Leadership–and the Lack thereof: what Might that Mean vis-a-vis Municipal Bankruptcy?

eBlog, 9/19/16

In this morning’s eBlog, we consider the green light the Detroit Financial Review has given to Detroit, before heading east to the capital city of Hartford—a city fighting to avert municipal bankruptcy, and then veering south to Opa-Locka, Florida: a city that seems doomed to go into chapter 9 municipal bankruptcy. It seems that severe municipal fiscal distress can arise from human failures—and recovery, as we are experiencing in Detroit—can arise from great leadership. Distress—and municipal insolvency—can arise from great, state-blessed inequity: an issue in Michigan, California, Kansas, Connecticut, etc. Even though the cost of municipal bankruptcy can far outweigh what it would have cost for states to address fiscal disparities—as the recent court decision in Connecticut found: “[T]he state’s current system ‘has left rich school districts to flourish and poor school districts to founder,’ betraying its promise in the State Constitution to give children a ‘fair opportunity for an elementary and secondary school education.’”  

A Major Step Forward. The Detroit Financial Review Commission, created as part of Detroit’s exit from the largest municipal bankruptcy in the nation’s history to oversee the city’s recovery, has declared the city was in substantial compliance with the terms of its plan of debt adjustment—both a measure of the hard work of Mayor Mike Duggan, but also a key step towards the city’s exit from state oversight. The thumbs up came in the wake of certification of an audit of the city’s FY2015 budget; the city faces comparable hurdles over its next two, consecutive fiscal years in order to remove the state yoke under the provisions of the Michigan law adopted two years ago to govern the city’s path out of chapter 9 municipal bankruptcy. Unsurprisingly, Mayor Duggan described the Good Housekeeping state seal of approval as a “major step forward: The Legislature set up a process that said the city can earn its way out of direct financial oversight, and it has to balance the budgets and pay its bills for three straight years…I couldn’t be more pleased that we have one year down, and we’ve been certified as being fully compliant with the statute.” The Motor City has posted surpluses in recent years on the city’s nearly $1 billion annual budget; the city administration projects a balanced FY2017 budget: the prize: If the city stays within budget, and an audit is certified in 2018, Detroit could end nearly a decade of direct oversight and go into a period when the review commission would be mostly dormant, freeing the city to operate without getting required approval from the review commission on matters including budgets, budget amendments, contracts, and labor agreements.

That does not, however, mean the long road to recovery is easy: Detroit still faces fiscal challenges in the long-term, including a $490-million shortfall in pension funding the city will have to pay in the coming years—a challenge which, if unmet, would retrigger a renewed three-year period of state oversight by the review commission. Nevertheless, State Treasurer Nick Khouri congratulated city officials for getting to this point, calling it a “milestone for the city,” even as Detroit CFO John Hill noted the declaration starts the clock on the city’s path back to local control: “It really does put us on a path to the city having almost full control of its financial operations…”It’s a major milestone and an acknowledgement that we’ve made a lot of progress.”

Staving Off Chapter 9 Municipal Bankruptcy. First-term Hartford, Connecticut Mayor Luke Bonin is scrambling to fix what he terms a “broken system” and keep his city out of chapter 9 municipal bankruptcy, albeit noting that he is confronted by a broken system that relies 100 percent on property taxes for local revenue—or, as he puts it: “You’ve got a city that just doesn’t have enough property. It’s got less property than the surrounding towns.” His uphill challenge as Mayor of the state’s capital city has garnered the support of the Connecticut Conference of Municipalities, whose Executive Director, Kevin Maloney, is supporting by seeking a regional approach through his organization: “Work cooperatively with the suburban towns to find where services can be shared and be done regionally, which would not only reduce the cost for the cities, but hopefully would reduce the costs for suburban towns.” The Conference has already created a panel with leaders from larger cities such as the chapter 9-experienced city of Bridgeport, as well as New Haven and Waterbury, as well as suburbs that will meet monthly to discuss this option. For his part, Mayor Bronin notes: “This isn’t about Hartford’s success or failure. This is about Connecticut’s success or failures, the region’s success or failure. You can’t be a suburb of nowhere, you can’t be a region or a growing state if you’ve got a city that’s in crisis.” Nevertheless, the challenge will be great: Hartford confronts nearly a $50 million hole in this year’s budget, which has left city services at a bare minimum, and the city could face another $50 million deficit next year. Or, as the mayor puts it: “You can’t cut your way to growth and you can’t tax your way to growth.” Indeed, it seems that he recognizes the city will be unable to get out of its fiscal debts by itself; consequently, he is pressing for regional tax and revenue measures to help Connecticut’s cities, urging the Connecticut Municipal Finance Advisory Commission: “We do not see a way the city of Hartford can avoid projected deficits on our own without some significant reforms at the state and regional levels.” Absent some fiscal assistance, the Mayor warns the state capital could run out of cash before the end of this year: he projects a nearly $23 million deficit in this fiscal year’s budget, but warns the fiscal chasm could more than double by next year—reaching a level of nearly 20% of total expenses by FY2018. Ergo, he suggests, regionalization could stave off municipal bankruptcy: “We want to do everything to avoid that, because I don’t think it would be good for the state of Connecticut; I don’t think would be good for the region, and I don’t think it would be ideal for the city of Hartford.”

Capital Bankruptcy? Hartford, were it to seek chapter 9 municipal bankruptcy, would only be the second state capital in U.S. history to file for municipal bankruptcy—but that earlier effort turned out to be a botched one: the filing, by Pennsylvania’s capital city, Harrisburg, a filing done over the objections of the Mayor, was rejected by the courts as being non-compliant with Pennsylvania’s municipal bankruptcy authority—indeed, five years ago on August 1, 2011, Pennsylvania’s Governor signed into law new legislation that would bar any “City of the Third Class” from filing a chapter 9 petition, specifically referencing Harrisburg. It would also be only the second time a municipality in the state had sought chapter 9 protection: Bridgeport, filed for Chapter 9 bankruptcy in 1991, but a federal judge rejected the filing, because the city did not meet the U.S. Bankruptcy court’s definition of insolvency. Nevertheless, unlike almost every other chapter 9 filing in U.S. history, the effort in Connecticut is unique, because Mayor Bronin and other Connecticut mayors are seeking to craft a legislative package in the state legislature which would lessen reliance on the property tax, and move towards a Denver or St. Paul-Minneapolis type of regional tax—in no small part because Hartford, not unlike other New England capital cities, has less taxable property than several its surrounding suburban cities. According to Moody’s Investors Service, general fund reserves for the three cities range from 0.3% to 3.7% of fiscal 2015 revenues, well below the 12.9% state median for Moody’s-rated cities. Our respected colleagues at Municipal Market Analytics suggest that Hartford could model its regional recovery approach after what Pittsburgh has accomplished, as we noted in our report on the city—but, as MMA put it: “If its problems are left unaddressed, its fiscal position and attractiveness as a regional business center will reasonably continue to decline.” Nevertheless, the Mayor’s road ahead will be steep: His request earlier this year to Connecticut General Assembly oversight panel failed to gain a response—forcing the City Council to approve what the Mayor had deemed a $553 million “doomsday” budget calling for across-the-board service cuts. Municipal debt service, according to Mayor Bronin, spiked more than 50 percent to $31 million this year: it is projected to soar to $61 million by FY2020-21.

It is not that Mayor Bronin is new to this municipal challenge: even though he is a first-year mayor, he has previous experience as former chief counsel to Gov. Daniel Malloy. Mayor Bronin is seeking increased payments in lieu of taxes, regional revenue sharing, ala the Twin Cities or Denver regional area, as well as widening options for local revenue generation—albeit knowing that in a state where Connecticut Superior Court Judge Thomas Moukawsher this month ordered the state to make changes in everything from how its schools are financed to which students are eligible to graduate from high school to how teachers are paid and evaluated, holding that “Connecticut is defaulting on its constitutional duty” to give all children an adequate education, Connecticut is a state here inequality appears to be the norm. Judge Moukawsher’s decision, in response to a lawsuit filed more than a decade ago claiming the state had undercut the allocation of school funding to its poorest district, is certain to require to reconsider nearly every aspect of public school financing—or as long-time Bridgeport Mayor Joseph Ganim put it: “This is a game changer…It’s an indictment of the application of the system, and of the system itself.” Inequity seems to be the rule of thumb in the state—a state where state-local collaboration is a tall order. Nonetheless, Connecticut Comptroller Kevin Lembo notes: “The mayor is on the absolute right track in trying to tie their fates together, but it’s not going to happen just because someone asks for it to happen, and the state is never likely to mandate that…You can look at ways to build partnerships. For example, not driving office parks out to the suburbs by giving the suburban communities a piece of the property tax action when they build downtown.” He added that such partnerships could include communities which are losing population, but have “very sophisticated and high-performing school districts” to attract more children from stressed city school districts. Nevertheless, he also noted the state should examine cities’ books and propose sustainable remedies: “Historically the state has always just thrown money at a perceived problem, less so in the suburbs, more so in the cities…We’ve always solved the short-term problem, and then walked on and dealt with something else.” Finally, he noted, the state has “a couple of more cards to play” to benefit Hartford, including the sale of vacant space—an interesting observation—and one that was of key concern to the nearby capital of Providence as it danced on the edge of municipal bankruptcy, even as nearby Central Falls went into chapter 9. As Comptroller Lembo notes: Connecticut has a “ton of property in Hartford and all over the state. Some producing, some of it is sitting there, just empty office buildings,” leading him to ask: “When was the last time somebody calculated the value of that asset? It may be putting more property back on the tax rolls in Hartford.” Moody’s last week deemed Judge Moukawsher’s ruling a credit positive for Hartford, Bridgeport, and New Haven: “If the court’s ruling holds, we believe funding levels for schools in low-income communities will increase and could occur in two ways: 1) Increased funding could be distributed through a reallocation, where funding is shifted from more affluent municipalities. Or, 2) the state could expand the total pie, increasing spending for some cities while allowing more affluent communities to maintain existing funding levels or receive some increases.”

On the Road to Chapter 9? It seems that municipal bankruptcy can be a product of criminal behavior—certainly a key factor in Detroit’s road to the nation’s largest-ever municipal bankruptcy—or incompetence. It might be that for the small city of Opa-locka, Florida: it is a combination. Now a business owner who worked with the FBI to uncover shakedowns by city officials has, this week, filed suit in federal court claiming he suffered years of what he described as “extortion, coercion, threats and intimidation” which violated his civil rights and right to due process. The owner, Mr. Francisco Zambrana, has laid out details of his efforts to obtain a business license—one which he was never able to gain. In his suit, he describes his version of his encounters with key city officials, including City Commissioner Luis Santiago, and a then-assistant city manager, David Chiverton, claiming each had demanded payoffs for a business license he never received—or, as his complaint cites: “From the onset, Zambrana simply sought to obtain an occupational license…Zambrana would repeatedly tell the city officials and employees who would care to listen that all he wanted to do was work and provide for his family, including teenage son who was battling cancer.” The suit could hardly have arisen at a more awkward moment: the small municipality, under investigation by the state and under the control of a state-appointed financial oversight board, is in the midst of public hearings to develop its FY2017 budget—but unable to pay its current bills. The suit, ergo, can hardly be settled—likely numbering the luckless Mr. Zambrana in a crowd of debtors for some future plan of debt adjustment. In his complaint, Mr. Zambrana described the municipality’s “practice and custom of threatening, intimidating, and extorting individuals” based on national origin to operate a business in the city. The suit adds: “The practice and custom was authorized by policymakers within the city, and it was a widespread practice so permanent and well-settled as to constitute a custom or usage with the force of law.” In this instance, Mr. Zambrana, finding an unresponsive municipality, leapt two levels to the federal government: he went to the Federal Bureau of Investigation and agreed to work with the FBI to uncover the shakedown scheme, an investigation whose findings led to by then City Manager Chiverton to plead guilty to pocketing payoffs. His suit cites the municipality as the sole defendant—likely recognizing the lack of any remote possibility from Mr. Chiverton—and he has requested a jury trial. In the category of fiscal misery loves company, the litigation costs to Opa-Locka’s taxpayers is accruing: the suit follows in the wake of one former City Manager Roy Stephen Shiver filed at the end of last month in U.S. District Court in the wake of receiving permission to so file from the U.S. Equal Employment Opportunity Commission to file a complaint alleging racial discrimination: the suit claims he was defamed by a trumped-up allegation that he accepted a bribe—and that, last November, he was fired without proper cause by city commissioners and the mayor, all of whom are black. Indeed, it was the former city manager who first reported Opa-Locka’s serious financial problems to Gov. Rick Scott just about a year ago—a report which contributed to the state appointment of a state financial oversight board to handle all city expenses, including legal fees. Even as the state ponders action, it will not be alone: the Securities and Exchange Commission has opened an inquiry into some of the city’s bonds, which were issued as its financial condition was severely deteriorating, and the FBI’s investigation is ongoing.

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Can A City Go Back into Municipal Bankruptcy?

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eBlog, 8/15/16

In this morning’s eBlog, we consider the un-considerable: could a city fall back into municipal bankruptcy? While this eBlog has, since the completion of our MacArthur Foundation studies on Stockton, San Bernardino, Detroit, Chicago, Pittsburgh, and Baltimore, focused on the steep roads into and out of municipal bankruptcy—and the perilous paths into potential municipal bankruptcy in Atlantic City, Opa-locka, East Cleveland, etc.; we have also followed the rhythmic efforts of retired U.S. Bankruptcy Judge Steven Rhodes who, having graduated from overseeing the City of Detroit’s entry into and exit out of chapter 9 now is at the helm seeking to steer the Detroit Public Schools on a course to avoid chapter 9—a course itself critically intertwined with Detroit’s long-term solvency.

We have also sought to compare and contrast the different ways different municipalities have gone through quite different paths into and out of municipal bankruptcy (Federal law provides for municipal bankruptcy—if authorized under state law—something only 18 of the states have authorized—but no two states have the same provisions: there are remarkable differences in these respective state laws.) Detroit emerged in 16 months under a Gubernatorially imposed emergency manager—where the Mayor and Council were barred from any vestige of governance; Jefferson County emerged in about two years (with some provisions still under appeal), but with the County Board remaining in charge of governance throughout; Central Falls, Rhode Island—where the Governor appointed a state emergency manager—who barred the sitting Mayor and Council from City Hall—emerged from chapter 9 in just over a year; Stockton emerged from its chapter 9 in two and a half years; and San Bernardino appears on the verge of exiting chapter 9 as early as next month—the longest municipal bankruptcy in U.S. history, just about four years.

Never in U.S. history, however, has there been an instance of a city emerging from chapter 9 municipal bankruptcy—but then going back into municipal bankruptcy. Now, as we watch events in Stockton (see below), there is apprehension that November’s municipal elections could reverse the city’s fiscal course. Thus, we begin to consider, with untoward events happening in Stockton, post-municipal bankruptcy elections: how does a city choose a course for the future? Here, the choices seem bleak in Stockton—the city nearly one full year out of bankruptcy.

Post Municipal Bankruptcy Blues II.  Stockton Mayor Anthony Silva, who—in the midst of his re-election campaign, for the city’s first post-chapter 9 election—was arrested last week and had become engulfed in a major separate controversy the week before that, sent an email to District Attorney Tori Verber Salazar last Friday alleging that his challenger, Councilmember Michael Tubbs, and four other Council Members violated California open meeting laws when they held a joint news conference one week ago outside City Hall. Mayor Silva, who is out on $20,000 bail, publicly posted his allegation of a violation of California’s Ralph M. Brown Act on Facebook: “This letter is to call your attention to what I believe was a substantial violation of a central provision of the Ralph M. Brown Act, one which may jeopardize the finality of the action taken by the City of Stockton. (The Ralph M. Brown Act, §54950, is California’s open meeting law. The law’s intent is that the actions of public commissions, boards and councils in California be taken openly and that their deliberations be conducted openly.) The speakers described an ‘approval in concept,’ or some other reflection of a consensus that the body would act or not act in a certain manner in the future.” City Attorney John Luebberke, however, last week stated he does not believe the news conference convened by Councilman/candidate Tubbs (a news conference also attended by City Council members Michael Blower, Elbert Holman, Susan Lofthus and Dan Wright) was in violation of the Brown Act. At the press conference Councilman/candidate Tubbs noted: “This press conference was one in which the members of the Council sought to assure citizens and residents that the council was still functioning. Maybe there was some political grandstanding involved — I’ll leave that to others to decide — but even if that’s the case that does not run afoul of the Brown Act.”

With the citizens of Stockton less than 12 weeks from the first post-bankruptcy municipal elections, it appears the intervening weeks risk being consumed with charges and countercharges (two weeks ago, it was revealed that a long-missing gun owned by Mayor Silva had been recovered by police two months earlier—a gun which had been determined to have been the murder weapon in the unsolved killing of 13-year-old Rayshawn “Ray Ray” Harris in late February of 2015 in south Stockton—a gun which Mayor Silva had not reported stolen until one month after the victim was slain—even though the Mayor acknowledged last week he knew the gun was missing at least two weeks before Mr. Harris’ death.) The District Attorney’s Office has noted that Mayor Silva has not cooperated with investigators since the gun’s recovery two months ago—a claim which Mayor Silva has strongly disputed. In addition, as we have previously noted, last Thursday authorities had arrested Mayor Silva in Amador County on charges he illegally recorded teens while playing strip poker last summer at a youth camp he runs. A 16-year-old boy is reported to have been one of multiple naked teens. Mayor Silva is scheduled for his first court appearance Thursday afternoon.

Crime and public safety were critical public policy issues both in Stockton’s collapse into municipal bankruptcy—and emerging. Indeed, the annual budget for FY 2014-2015 was developed with an emphasis on Mayor Silva’s proposed budget priorities and City Council’s post-municipal bankruptcy strategic goals and targeted areas. The Mayor had identified three priorities in his Proposed Budget Direction, and the City Council had held a strategic planning session which identified seven target areas expanding upon the Mayor’s overall direction: Public Safety, Fiscal Sustainability, Organizational Development, Economic Development, Youth, Infrastructure, and Public Relations/Image—goals and target areas intended to renew and expand upon Council’s previous Strategic Priorities. There was a clear recognition that high rates of crime had to be addressed as part of any successful plan of debt adjustment. Today, however, Stockton crime statistics report an overall upward trend in crime based on data from 14 years with violent crime increasing and property crime increasing. Based on this trend, the crime rate in Stockton for 2016 is expected to be higher than in 2012—a year when the city violent crime rate for Stockton was higher than the national violent crime rate average by 300.11% and the city property crime rate in Stockton was higher than the national property crime rate average by 79.21%. The campaign news from Stockton can only be described as grim, mayhap portending the first-ever reversion back into municipal bankruptcy.

What Comes After Municipal Bankruptcy?

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eBlog, 8/12/16

In this morning’s eBlog, we consider post municipal bankruptcy elections: how does a city choose a course for the future? Here, the choices seem bleak in Stockton—the city nearly one full year out of bankruptcy. Then we consider the ongoing state-local challenges between the State of New Jersey and Atlantic City—a city not far from the knife edge of insolvency, followed by the rhythmic efforts of retired U.S. Bankruptcy Judge Steven Rhodes to get the new Detroit Public Schools the best possible leaders in his current position as the state-appointed emergency manager. Then we observe the process underway in Florida with a state oversight effort to assess the options for the future of Opa-locka. Finally, we consider the dire water situation in East Cleveland—the small city awaiting a determination of its fate: whether it will be chapter 9 municipal bankruptcy or incorporation into the City of Cleveland.

Post Municipal Bankruptcy Blues.  For a city emerging from municipal bankruptcy, the road from insolvency to recovery can be steep. In Stockton, California, where the frieze above the steps of City Hall reads: “To inspire a nobler civic life: to fulfill justice; to serve the people,” the question for the city’s voters appears to be a dispiriting choice in November’s mayoral election—the city’s first post municipal bankruptcy election—one pitting incumbent and just arrested Mayor Anthony Silva against a young City Councilmember with a pending DUI charge, Michael Tubbs. The election will mark the city’s first post-bankruptcy election in the wake of last year’s decision by U.S. Bankruptcy Judge Christopher Klein a year ago in February to approve the city’s plan of debt adjustment—a plan approved in the wake of the municipality’s success in securing voter support for more than a 10 percent increase in the local sales tax—with the bulk of the new revenues dedicated to address apprehensions about crime. The approved debt-adjustment plan provided for reductions in public employee benefits, funding cuts for police and fire, and reduced payments to the city’s creditors. (City Council members had already unanimously approved personnel cuts two years prior to the filing, but further cuts were made to parks, library, and senior programs.) The plan of debt adjustment approved by Judge Klein also eliminated post-retirement health care benefits valued at a minimum of $300 million, but continued payments for retirement benefits via the California Public Employees’ Retirement System (CalPERS). Now, in the first post-municipal bankruptcy municipal election, it seems key issues confronting voters are the city’s crime rate (albeit, now the two candidates’ crime rates)—and the question with regard to how the court-approved plan of debt adjustment will shape elections for mayor and three of six city council seats on November 8th. Mayoral candidates Mayor Anthony Silva and challenger Michael Tubbs have and are sparring over the best post-bankruptcy direction for the city.

Mayor Silva won election to his current office in November 2012 by tying his opponent to the consequences of the city’s bankruptcy, criticizing his predecessor for a year of high crime rates and failure to properly oversee the city’s finances. After securing election, he pressed for an increase in sales taxes to pay for law enforcement costs, which ultimately reached the ballot in November 2013 after adjustments by the city council. In the wake of the city’s emergence from chapter 9, Mayor Silva has promoted plans for new business development in Stockton to generate more revenue: he proposed a $170 million development plan in December of last year, a plan which included expanding the airport for international flights and spending $72 million to add arcades and rides on the river walk. The Mayor also proposed opening abandoned warehouses as shelters for the homeless. But his road to re-election took a significant detour earlier this month in the wake of his arrest at his Mayor’s Youth Camp in Silver Lake, California, where he was charged with playing strip poker with naked teenagers, providing alcohol to minors, and illegally recording the activities that are said to have occurred at last year’s camp in the wee hours of Aug. 7, 2015. That morning five unmarked law enforcement vehicles rolled onto the rustic grounds of the Stockton Municipal Camp at about 9:30 a.m.: two of them parked so they would block the one-lane road to enter and exit the site: Thirty minutes later, without incident, Mayor Silva was driven away by officers in one of the unmarked vehicles and taken to the Amador County Jail, where he was booked by Amador County sheriff’s officers. His first court date is scheduled for next week at Amador County Superior Court: the Amador County District Attorney’s Office and the FBI are the investigating agencies. The arrest does not bode well for his re-election campaign.

In the Clear? Moody’s credit ratings agency has reported that the state loan to Atlantic City should offer the requisite time for the Mayor and Council to draft a five-year budget plan which would avert not only municipal bankruptcy, but also a threatened state takeover. Moody’s yesterday wrote that the $73 million state loan is a positive for the city’s junk credit rating—and that, absent the loan, there would have been a high probability the city would default on its debt in the next few months. Moody’s, being more characteristically moody, however, added that the planned Trump Taj Mahal closure could further cut the amount of tax revenues to the municipality, writing that the city’s fiscal condition remains dire because of its dependence on the shrinking casino industry.

More Schooling on Insolvency. Retired U.S. bankruptcy Judge and current Detroit Public Schools state-appointed emergency manager Steven Rhodes yesterday reported he had met with Michigan Gov. Rick Snyder this week and had agreed to extend his contract as transition manager of the DPS until January—the date the new school board is to be sworn in. Judge Rhodes defined the election of the new board as “the single most critical issue” DPS confronts this fall, noting whomever is elected must come to the position committed to transforming DPS into a system that will not only adapt to the future needs of its 45,000 students and earn the support of the region’s businesses, but also its religious and civic communities—important enough indeed that the Judge spent two hours in a special session with 53 of the 68 candidates vying for office to fill them in on DPS’ condition and answer questions about the job. Judge Rhodes plans more such sessions. In addition, he has encouraged all of the candidates to get training on how to be an effective school board member. Judge Rhodes has been direct and clear about what those elected should bring to the table: “It may feel simplistic, but it’s the kind of stuff that can’t be emphasized enough…The No. 1 thing is commitment to serve as a trustee for the benefit of the district’s students. What that means is there’s no other agenda, no vision on higher office, no self-aggrandizement. It’s got to be all about the district’s students.” He added that new board members must recognize that DPS is not just for college-bound children, but for those whose future vocations can be taught outside of universities, and he said the board must find ways “to compensate teachers whose dedication and sacrifice.” They must commit themselves to excellence in academics and commit to hiring a permanent superintendent with that same commitment, while at the same time recognizing the diverse needs and interests of each of DPS’s 45,000-plus students: “They’re not all going to college. Many have special needs. Some want to do career technical education. Our academic offerings need to be as diverse as our student interests.” Judge Rhodes also warned that education “does not begin when the child walks into the school door and end when the child leaves the school door: “there has to be a continuing commitment to parental engagement in the educational process.”

Interestingly the electric rhythm guitar player of the famous Indubitable Equivalents also noted that he expects new DPS board members to respect the Financial Review Commission, a state entity created as part of the city’s plan of debt adjustment, but which has created some resentment in the city—stating: “This will be challenging, but the FRC is a fact of life, and they really do want to help…The nature of the FRC’s role and responsibilities in relation to DPSCD (Detroit Public Schools Community District) is going to be a matter of continuing discussion and negotiation. The school board…will continue that conversation. There will not be an emergency manager per se, but the enabling legislation for the Financial Review Commission is subject to interpretation, and that will take time to work out. There is a view which says it isn’t just to balance budgets and books of record, but no one over there wants to be involved in day-to-day academic issues.” Finally, Judge Rhodes urged that the new board would need to work with Mayor Mike Duggan—urging an end to what he called the “us versus them” mentality, both in and outside the city of Detroit: “[The school board has to figure out a way to break through that on both sides of the city boundaries.” Finally, and appropriately, he noted new school board members must be willing to learn: “Being an effective school board member is an art. It has to be learned so there has to be a commitment to learn how to do that.”

Oompapa. A south Florida public administrator, Merrett Stierheim, will determine if Opa-locka is solvent for a Florida state-appointed panel Gov. Rick Scott appointed last June 1st in the wake of the city’s entering into an agreement seeking the state’s assistance, which does not include funding. The panel is charged with overseeing the small municipality’s finances and to report upon the “gravity of the situation faced by Opa-locka,” as well as to oversee the hiring of a Finance Director for the city, according to Melinda Miguel, Chair of the Financial Emergency Board. Ms. Miguel made the announcement yesterday after noting the state appointed emergency board had received incomplete financial reports and requests for payments without details or invoices. Ms. Stierheim comes to the challenge with a background of experience with other fiscally challenged municipalities, including Miami in the late 1990’s, when it was in the midst of a corruption scandal and a financial crisis that led then-Gov. Lawton Chiles to appoint a Financial Emergency Board. Chair Miguel, who is Gov. Scott’s chief inspector general, yesterday said Opa-locka Mayor Myra Taylor had approached her for a second time requesting that the state provide the city a bridge loan, such as an advance on revenue-sharing funds—the city is apprehensive it could run out of cash before the end of next month. In addition to those fiscal and legal challenges, the SEC has opened an inquiry into whether proper disclosures were made about the city’s fiscal state, and there are federal corruption investigations ongoing: last week, the former city manager, David Chiverton, and former public works supervisor, Gregory Harris, were arrested and charged with taking kickbacks from business owners and individuals. Ms. Miguel mentioned the arrests in her opening statement, noting the city’s residents and taxpayers have “paid a steep price” by placing trust in their government officials, adding: “The citizens of Opa-locka have a right to know that their money is well spent…Instead, we see corruption. We must continue on our search for the truth.”

A Different Kind of Water Problem than Flint. East Cleveland, Ohio, a small municipality awaiting a decision whether it may file for chapter 9 municipal bankruptcy or become a part of the City of Cleveland is running out of time. Now hard decisions—such as whether to cut off water service or pay a $30,000 delinquent water bill owed to Cleveland Municipal Water Department demonstrate the fiscal chaos in the city—and bring back recollections of one of the most difficult issues in Detroit’s municipal bankruptcy: how does a city balance insolvency against the public health and safety issues of water? In this instance, East Cleveland opted to pay most of the massive balanced owed, a bill for which prior nonpayment had caused Cleveland’s water department to shut down water service to some East Cleveland properties. Now East Cleveland Council President Thomas Wheeler reports the city is facing an additional one million dollar shortfall in 2017.

How Do State-Local Relationships Affect Fiscal Futures? What Might Puerto Rico’s Fiscal Future Be?

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eBlog, 8/10/16

In this morning’s eBlog, we consider yesterday’s day-long session on Puerto Rico in New York City; we then turn to the uncanny Jim Spiotto’s related and invaluable insights into the newly enacted, but unimplemented PROMESA legislation; then we consider the failure in New Jersey to offer the state’s voters an opportunity in November to address either the state’s long term inability to address either its public pension liabilities or deteriorating public infrastructure; then we look at neighborhood initiatives emerging in Detroit; and, finally, the criminal activities which have exposed Opa-locka, Florida to potential municipal bankruptcy or dissolution.

Puerto Rico: What’s Next? Greg David, the marvelous Director of the Business & Economics Reporting Program at the CUNY Graduate School of Journalism and head of the school’s Ravitch Fiscal Reporting Program, yesterday hosted what has become an annual session on Puerto Rico: with the June 30 passage of the PROMESA debt restructuring bill—and, as we await the appointment of the PROMESA Board, the Ravitch Fiscal Reporting Program at the CUNY Graduate School of Journalism (with the ever tireless Mr. Ravitch very much present and participating). The event took an entire day to examine what is happening now to the U.S. territory as part of a special one-day conference for reporters and editors: the issues covered included: The basics: All you need to know about the Puerto Rico Oversight, Management and Economic Stability Act; Debt restructuring and the bond market: Possible debt scenarios and the impact on the future of the bond market; Government and politics in Puerto Rico with a control board; and The Economy: an Update and implications—obviously too much for this participant and presenter to even pretend to encapsulate in this a.m.’s eBlog. The different panels were not just dynamic, but demonstrated the vast differences in perspectives—including one presenter deeming PROMESA “a useless exercise.” The presentation by the N.Y. Federal Reserve (Restoring Economic Growth in Puerto Rico: Introduction to the Series) by Messieurs Andrew Haughwout, Hunter Clark, and Giacomo De Giorgi of the New York Federal Reserve was a double bonus in that it offered rich new resources—and their new blog, Liberty Street Economics—which features posts on options for addressing the U.S. Territory’s fiscal challenges—for scholars and eBlog readers since their post on options for addressing its fiscal problems, which features insight and analysis from economists working at the intersection of research and policy began appearing last fall—posts which have been a follow-up to not only the session we co-hosted with the N.Y. Fed, but also a series of analyses, starting with a 2012 report that detailed the economic challenges facing the Commonwealth. In most of this work, the three Fed musketeers have focused on how policymakers could help to address the immediate issues facing Puerto Rico and its people. It has been especially invaluable because of this new set of Blogs they have put together.

In the wake of Puerto Rico’s skipping payment on nearly $1 billion to municipal bondholders on July 1st, including some $780 million of principal and interest on general obligation bonds—the largest municipal default ever in the $3.7 trillion municipal-bond market and the first time a state-level borrower has ever failed to pay on its direct debt since the 1930s, yesterday’s event was clearly timely. It came as Cleary Gottlieb, Puerto Rico’s legal adviser is seeking to reduce a $70 billion debt load, and participating in discussions with U.S. Treasury staff, Commonwealth leaders, and creditors with regard to how to restructure the U.S. territory’s debt—as Puerto Rico is not authorized to file for chapter 9 municipal bankruptcy. It comes for a U.S. territory with a poverty rate in excess of 50 percent for its children—and faced with discriminatory federal policies. Thus, every day of delay in appointing the PROMESA board to address Puerto Rico’s debt, revenue mix, expenses or budget, and its public pensions will make the steep climb out of insolvency in a non-chapter 9 eligible world that much more challenging.

Implication for Municipal Bankruptcy. Ironically, our session yesterday came at the same time as the godfather of chapter 9 municipal bankruptcy, Jim Spiotto, yesterday described PROMESA as “unique in our justice system:” it is the first law in U.S. history that carves out a period outside of bankruptcy for bondholders to negotiate terms of a restructuring (referencing Title VI, §601(j)), which addresses how municipal bondholders can agree to modify their own bond terms and provides that holders of at least two-thirds of each bond pool’s principals who vote must approve the modification and holders of at least 50% of total principal outstanding in each pool must approve it. Under the new federal law, every municipal bond issuer has at least one pool of bonds, and these bonds are divided into different pools if they have different priorities or security features. Mr. Spiotto added that, under the Trust Indenture Act, which normally applies to municipal bonds, 100 percent of bondholders must agree to changes in certain terms such as principal, interest, and maturity; however, he notes, PROMESA, trumps (not an intended pun) the Trust Indenture Act with regards to Puerto Rico bonds.

In a Chapter 11 bankruptcy (available to both corporations and individuals), at least two-thirds of the holders of the debt by amount and half by number of holders must vote to accept a restructuring offer before the resolution can be accepted. But as Mr. Spiotto notes in describing the distinction from Chapter 11, that chapter involves a consideration of all of a creditor’s debts under a court-supervised process. In contrast, PROMESA extends this negotiation and voting process to those negotiating a particular class or classes of debts and does so outside of a process overseen by a federal court. One key distinction is that an issuer’s public pension holders or suppliers owed money are ineligible under PROMESA to reach a collectively negotiated solution, albeit, he notes, they could be affected by the federal court-supervised process in the law’s Title III. Interestingly, the Wizard of Municipal Bankruptcy notes that the new law’s Title VI had its origin in the terms found in foreign sovereign debt: these bonds allow bondholders to vote to change the fundamental bond terms. He added that the new law’s Title III (affecting restructuring) is basically a substitute for Chapter 9 municipal bankruptcy—except, unlike in Detroit, San Bernardino, etc., the new law provides for an oversight board. Mr. Spiotto, however, believes the new law’s Title VI is not just a break from the traditional municipal bankruptcy law, but also the provision which will prove most controversial—in large measure because it could be interpreted to provide for the retroactive modification of existing contractual rights—and do that via a process not under federal court oversight, much less the protections which the federal bankruptcy code provides to dissenting class members, including the requirement that the debtor demonstrate that the various legal standards for confirmation contained in the Bankruptcy Code are met, and with review by the federal district court only to determine if the modification is “manifestly inconsistent” with the act. Mr. Spiotto notes that because PROMESA requires 50 percent of the holders of outstanding par to vote in favor of a modification of terms—in contrast to chapter 9 municipal bankruptcy under which it is, instead, 50 percent of the votes of those who vote, it may prove a greater challenge to agree upon a voted-upon modification.

Governance & An Appealing Outcome? As in Chapter 9, where there were appeals in the Detroit and Stockton municipal bankruptcies, appeals to the 6th and 9th U.S. Circuit Courts of Appeal (never acted upon), the new PROMESA Act similarly permits appeals; the key difference from the Jefferson County, Detroit, and San Bernardino cases is that Puerto Rico’s case, because it will proceed under the new PROMESA statute, is already in the U.S. district court with only the right to appeal decisions to the circuit court. As the Chicago wizard Mr. Spiotto notes, however, under PROMESA, if a federal court becomes involved in a bankruptcy process, the court’s jurisdiction is to be limited to deciding on debt matters, according to Title III, §305, which, he adds, is similar to §904 of Chapter 9: which allows states to retain some sovereignty from the federal government in the bankruptcy process of their municipalities. Under PROMESA, that sovereignty is granted to the oversight board.

Out of Trust? Unlike the federal government, states and local governments have two kinds of budgets—operating and long-term, with the latter critical not just to infrastructure investment, but also to public pensions. But now New Jersey State Senate President Stephen M. Sweeney (D-West Deptford) has acted to prevent a measure from being considered by fellow senators for acting by the deadline for approving a constitutional amendment on the November ballot—a constitutional amendment guaranteeing quarterly state payments to the $71.5 billion New Jersey Pension Fund–a situation which has been complicated by a political battle that had little to do with pension benefits—and which appears to have pitted two critical long-term issues against each other: a nearly empty transportation trust fund and a nearly empty state pension promise. Moreover, the issue has been further complicated by last week’s request by Senate President Sweeney to top federal and state law enforcement officials to investigate what he termed coercion of legislators by leaders of public employee unions seeking voter approval of the proposed plan to require scheduled payments to the state pension system—threats which U.S. Attorney Paul Fishman deemed ones which “clearly cross the line from lobbying to attempted bribery and conspiracy…Essentially, [the New Jersey Education Association] has put members of the New Jersey State Senate in the position of tying specific official action to the receipt of a campaign contribution.” On the surface (not a pun), the amendment’s passage, one which requires a majority of votes in both houses of the Legislature, seemed likely. (The Democratic-controlled Assembly approved the proposal in June.) President Sweeney was the author of the Senate version, and there was sufficient support in the Democratic-controlled Senate. Moreover, Gov. Chris Christie, who bitterly opposed the idea, is prohibited by law from vetoing constitutional amendment legislation. However, what is simple in making legislative spaghetti is never what it seems: here the proposal has become ensnared in a dispute between the Legislature and the governor over financing the State Transportation Trust Fund, whose appropriations expired at the end of last June. So Democratic legislators have sought to raise the state gas tax to replenish the transportation fund; Gov. Christie and GOP legislators wanted tax cuts to offset the higher gas taxes.

Because the Governor can veto spending bills, President Sweeney wished to make sure he had veto-proof margins in both houses for any gas-tax and tax-cut package prior to allowing a vote on the constitutional amendment. However, he was unable to achieve that goal, so the transportation fund financing remains on empty, and the pension proposal is dead for this year—leading the Senate President to note: “With a resolution to the Transportation Trust Fund crisis — and a full accounting of how much future tax cuts will cost — it would have been too easy for opponents to argue that the state could not afford to pass the pension amendment…The pension amendment would have been doomed to defeat, and that would have given carte blanche to current and future governors to slash pension payments.” Nevertheless, because the Assembly has approved the measure, President Sweeney said the Senate could vote on the proposal any time during the current legislative session which ends in January to place the amendment on the November 2017 ballot: “If the proposed amendment was voted down this November, we would have to wait at least three years to put it on the ballot again, according to the New Jersey Constitution.” The public sector unions had pushed for the amendment after Gov. Chris Christie chose not to make the full contributions into the public-employee pension system—notwithstanding the New Jersey Supreme Court’s June decision, which upheld the suspension of cost-of-living adjustments to retiree pension benefits.

What Grade for this Governance or Tickled Pink? Detroit leaders are seeking designs to revive Detroit’s neighborhood main streets—even as they are also hoping to ease bureaucratic blocks which can interfere—asking urban planners, architects, preservationists, and designers to contribute to “Pink Zoning Detroit,” an initiative that sets out to transform the city’s complex land use rules and speed new development in its commercial corridors by reducing red tape. The project, which is being funded by a $75,000 grant through the John S. and James L. Knight Foundation, is to boast three multidisciplinary teams put together visions for walkable, mixed-use activity in three commercial sites in the Motor City; subsequently, the concepts will be tested against Detroit’s zoning ordinance and building code in order to determine what roadblocks exist and to identify strategies for reforms—or, as Maurice Cox, Director of the city’s Planning and Development Department, puts it: “For us, it’s just kind of crazy that the urban life that we want is actually inhibited or stymied by the very rules that are supposed to enable them to happen…We turn this upside down and say: ‘Let’s visualize the reality of this urban life that we want. Let’s look at where our current regulations don’t allow it and let’s just change the rules.’ This process will get us that.” With the process intended to select winners by the end of next month—after which the selectees will have six months in which to engage in research, design, and analysis; pilot “pink zones” could be identified as early as next summer, so that Detroit could test relaxed rules within certain boundaries—a process which could well serve as a model for other cities—and continue to herald post-municipal bankruptcy Detroit as, according to the Wall Street Journal, one of five cities “leading the way in urban innovation.” Some of this stems from Mayor Mike Duggan’s focus on “20-minute neighborhoods,” i.e. ones which allow residents to walk or bike to get everyday necessities.

Stick ‘em Up. In insolvent Opa-locka, Florida, the city’s assistant director of public works—in the wake of a three-year FBI investigation—has been charged in the first federal corruption case brought by prosecutors after a three-year FBI investigation into alleged bribery schemes at the highest levels of the municipal government. Gregory Harris, who resigned this week as assistant director of public works, is accused of conspiring with a city commissioner, city manager, and other employees to extort thousands of dollars in cash payments from Opa-locka business owners seeking occupational licenses, water connections, and other permits. It appears that Mr. Harris is cooperating with the U.S. attorney’s office and the FBI in the growing federal corruption probe: he is expected to plead guilty to a conspiracy; Mr. Harris is also pastor of an Opa-locka church and leads Bible studies. Now he had agreed to help FBI agents with their investigation commenced last March, when authorities led a dramatic raid on the city to seize public records, financial documents, and other evidence. He is accused of conspiring with “Public Official A” and “Public Official B” in the bribery scheme from March 2014 to March 10, 2016, the day of the raid—and, it appears, one of a party of top city officials involved in shaking down business owners who were working undercover for the FBI in a series of backroom bribes recorded on video. The FBI investigation is among the largest corruption probes in South Florida history—and one which appears likely to involve other elected and appointed city officials. According to information filed in federal court, Mr. Harris conspired with Public Official A, Public Official B and other government employees “to unlawfully enrich themselves by using their official positions and authority within the city of Opa-locka to solicit, demand and obtain payments and other things of value from businesses and individuals in exchange for taking official actions to assist and benefit [them].” Public Official A solicited and obtained “illegal payments” from businesses and individuals who were seeking occupational licenses and other permits for their properties in 2014 and 2015. In exchange for cash bribes, Mr. Santiago directed Mr. Harris and other Opa-locka employees to take care of the requests for occupational licenses, water connections, zoning benefits, and code enforcement violations.

The Teeter-Totter of Municipal Bankruptcy

eBlog, 8/02/16

In this morning’s eBlog, we consider the 4th anniversary of the nation’s longest ever municipal bankruptcy in San Bernardino: what lessons are there to be learned? How does its municipal bankruptcy compare to Detroit? Then we look to south Florida, where the small city of Opa-locka appears to be on the slippery slope into municipal bankruptcy.

Happy Anniversary? The City of San Bernardino yesterday completed its 4th full year in chapter 9 municipal bankruptcy—the longest in U.S. history. It is almost certain it will earn U.S. Bankruptcy Judge Meredith Jury’s gavel to emerge from bankruptcy this October: ballots for creditors to vote on the city’s proposed plan of debt adjustment were set to be mailed Friday, giving creditors until Sept. 2nd to object and the city until Sept. 30th to respond to those objections. U.S. Bankruptcy Judge Meredith Jury has scheduled a confirmation hearing — the final stage of bankruptcy — for Oct. 14, noting: “This case has gone at the speed it has to go…Now we have confirmation in view, and we’ll get there when we are supposed to get there. We are not Detroit, we are not Stockton; we came into this case in a very different posture, and therefore the fact that it took much longer to get to confirmation was to be expected.”

Confronted by a deficit exceeding nearly $50 million, or about forty percent of the $112 million in revenues the city expects this year, the city had filed for municipal bankruptcy when it reached the point of inability to provide for essential public services and recognized that without filing, the city’s creditors would overwhelm its future. In comparison, Vallejo, California emerged from chapter 9 in three and a half years, while Stockton emerged from chapter 9 in two and a quarter years. Detroit, which went through the nation’s largest municipal bankruptcy, was out of chapter 9 in less than 16 months; Central Falls, Rhode Island, in a much briefer time.

But the cost to the city of filing has been significant—estimates run to nearly $19 million alone in fees to the city’s attorneys and consultants, $6.2 million just over the last twelve months. But the price has not just been in dollars: the city’s voters have elected a new mayor, city attorney, and four of the seven City Council members—as well as the top unelected positions. Councilmember Fred Shorett, one of the few who has remained in elected office, notes: “I see us in much better shape: We balanced our budget, albeit with some deferrals. We have good new projects coming in, like the Carousel Mall…We’re still stretched very thin with our staff, and (City Manager) Mark Scott continues to remind us of that, but we’re going to continue to build that back up. I’m optimistic about the future of San Bernardino.”

Ground Zero. Opa-locka, Florida, the small city of the just 0ver 15,000 inside Miami-Dade County, is running out of funds—and leadership: City Manager David Chiverton stunned elected leaders by resigning his office in the course of a federal criminal investigation, and Opa-locka officials have announced the city is virtually insolvent and will be unable to pay its employees, including police officers next month. Mr. Chiverton had been a target of an ongoing FBI probe into corruption in Opa-locka; he had taken a leave of absence last spring after the Miami Herald revealed he paid himself tens of thousands in unused sick and vacation pay to which he was not entitled. (Other targets of the probe: Mayor Taylor and Commissioner Luis Santiago.) The city violent crime rate for Opa-locka in 2012 was higher than the national violent crime rate average by 618.54% and the city property crime rate in Opa-locka was higher than the national property crime rate average by 181.05%. Florida Inspector General Melinda Miguel last Thursday warned city leaders during an emergency oversight board meeting that with just $350,000 left in the city’s general fund, Opa-locka may have to consider bankruptcy. The warning came in a stunning sequence for the small city—one which has been under the oversight of a state financial emergency board since June, but has been unable to halt a mushrooming municipal deficit. The Florida Inspector General said she was upset by the city’s failure to meet yesterday’s deadlines to file a budget and recovery plan; the IG blasted the city’s elected leaders, stating they were not doing enough to keep costs down or tackling the critical problems that threaten the entire operation of the city: “I believe that we found that we are at ground zero of fiscal irresponsibility: While the city teeters on the verge of bankruptcy, we’ve had people ask what’s in it for me…From creditors, to commissioners, to employees, to crooks: what’s in it for me has to change. And we must all do our part…One of the biggest tests to resolving a problem is realizing you have one,” she said by phone from Tallahassee, as Opa-locka Mayor Myra Taylor and city commissioners sat in the front row staring at the local members of the state board. The new revelations about the city’s fiscal distress were significantly worse than Opa-locka’s own projections of last month.

In the meeting centered on the municipality’s impending insolvency—a municipality which just weeks ago had pledged that it was going to balance its budget, I.G. Miguel criticized the city for failing to stem spending at a time it is losing hundreds of thousands every month in revenue; she said the city had been raiding restricted funds to fill budget gaps and was in danger of defaulting on major payments: “Our message has been and continues to be: Not business as usual. And it still appears to be a leadership deficit in the city…While the city teeters on the brink of bankruptcy, we’ve had people ask: ‘What’s in it for me?’ From predators to commissioners to employees to crooks.”

Because Mr. Chiverton resigned yesterday, he qualifies for healthcare benefits through the end of the month; however, the oversight board chair put an end to any other perks, mainly because IG Miguel said she was troubled by his decision to cash in his unused vacation and sick time — totaling nearly $40,000 — before he went on temporary leave in May. Ms. Miguel said she did not want Mr. Chiverton to receive any final salary-related payment from the city until the board reviews it; she also demanded that Mr. Chiverton turn in his city-leased Ford Expedition along with his cellphone and laptop. In addition, she insisted that city officials cut off his access to all Opa-locka government computers and to City Hall immediately. IG Miguel urged city commissioners and administrators to continue to make “drastic cuts,” warning the city needed to be far more judicious about how much it was spending on items such as cellphones for employees.

The most serious issue now confronting the city: the city’s cash flow: Acting City Manager Yvette Harrell, who had replaced Mr. Chiverton in May, told the board Opa-locka currently has just $354,121 in its general fund — far below the millions it once maintained; the municipality also has $1.7 million in its water and sewer fund, and $1.2 million in a restricted reserve account. Nevertheless, with all of the city’s obligations, including payroll for Opa-locka’s 160-plus employees, Ms. Harrell warned the city will run out of money by next month: “Optimistically, by the end of September…Realistically, it will be closer to the beginning of September.” Indeed, so grave is the fiscal crisis that board members even debated whether the city could dip into the water and sewer fund — money set aside to fund Opa-locka’s badly deteriorating water system, with Ms. Harrell warning that if the city did not tap into the fund, Opa-locka would be broke within a couple of weeks: “Then, it’s lights out.” As it stands, Opa-locka will not be able to pay scores of its vendors — including contractors and health insurers —if it is to meet its next payroll early this month.

Uh oh. In addition to the city’s looming fiscal insolvency, it also confronts an ethics insolvency: the FBI’s corruption probe, which was launched three years ago. City Attorney Vincent Brown said several Opa-locka employees have been interviewed by FBI agents and have testified before the grand jury in Miami, adding the investigation was “ongoing,” and urging members of the community to contact the FBI in case they witness suspicious activities among elected leaders or city administrators. The city may also be in default of privately placed notes held by a local bank that could be accelerated – a fiscal challenge to be addressed in consultation with Florida Division of Bond Finance Director Ben Watkins.

Last June, the Governor had named a nine-member oversight board after Miami-Dade County determined the municipality was in a financial emergency and entered an agreement to get professional assistance from the state. Gov. Scott named IG Miguel as chair. At a recent session, board member Frank Rollason, City Manager for nearby North Bay Village, queried: “Can a municipality go bankrupt?” (In Florida, [see §§218.01 and 218.503], a municipality is authorized to file for chapter 9, but only after first obtaining prior approval from the governor.) Already the city has been barred from issuing any new municipal debt without IG Scott’s approval. That approval, itself, is almost certain to also depend upon the outcome of pending investigations by the Securities and Exchange Commission and the FBI, with the SEC examining whether Opa-locka properly disclosed its financial condition in its municipal bond documents for as many as two issuances that were privately placed with local banks; the FBI has raided city offices and removed documents which are believed to be related to spending irregularities. Meanwhile, the State of Florida has, to date, offered no state assistance to assist in Opa-locka’s recovery: the state oversight board has discussed the possibility of an advance from revenue-sharing funds to help the city through the lean months ahead before property tax collections come in; however IG Miguel has noted: “There’s got to be some other demonstration of fiscal responsibility: I’m not inclined to make that recommendation,” noting: “I must just point out that absent a budget, absent a financial recovery plan, absent an audit, and further demonstration of a cooperation issue or lack of cooperation issue constitutes malfeasance and misfeasance under the agreement,” she was most reluctant to recommend such assistance.

The Critical Challenge of Restoring One’s Property Tax Base

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eBlog, 6/24/16

In this morning’s eBlog, we explore the key steps underway in San Bernardino to restore the city’s critical property tax base—an essential element not just to approval by U.S. Bankruptcy Judge Meredith Jury of the city’s pending plan of debt adjustment, but also for any meaningful, long-term fiscal recovery. Then we turn to the very different kind of federal role in Opa-locka, Florida—already under a state takeover, but now under the impatient eyes of the federal Securities and Exchange Commission.

Restoring a Municipal Tax Base. The City of San Bernardino, once the key gateway from the East and Midwest to Los Angeles basin and former home to Norton Air Force Base, Kaiser Steel, and the Santa Fe Railroad—but today in chapter 9 municipal bankruptcy longer than any other city in U.S. history, is experiencing returns from its efforts to revitalize its property tax base—a base that was devastated in the Great Recession—which left the municipality with nearly 50 percent of its residents on some form of public assistance and 56 percent of homes underwater: it reduced property tax revenues by 15 percent. In the years leading up to bankruptcy, San Bernardino suffered heavily as important sources of revenue fell, notably property taxes: the San Bernardino FY2006-2008 CAFR reports show that property taxes generally accounted for about 30% of the city’s total revenue, but the Great Recession demonstrated that reliance on property tax revenues can be volatile. In the case of San Bernardino, the city had experienced a huge housing boom from 2001-2007, and a consequent growth in property tax revenues; but what goes up can come down, so the city was one which was especially hard hit when the housing market crashed. While home prices around the country fell by 24% from 2005 to 2010, they fell by over double that in San Bernardino, which also experienced a foreclosure rate around almost four times the national average. From 2008 to 2011, property tax revenue fell from $74.7 million to $46.7 million, a steep 37% decrease. Meanwhile, adding fiscal insult to injury, the state’s Proposition 13 barred San Bernardino and all California cities from attempting to make up this lost revenue through increased property tax rates. The 1978 constitutional amendment pegs the statewide property tax rate to 1 percent of a property’s assessed value at the time Prop 13 was enacted or the sale price when the property changes hands. Annual increases of assessed value are limited to 2 percent in the years the property is not sold. Therefore, unsurprisingly, focusing on vacant and heavily vandalized houses has been a critical component of the city’s focus on a turnaround and exit from municipal bankruptcy—and the city’s program: RENU, or the Receivership Empowering Neighborhood Upkeep, which it initiated a year ago in April 2015, and is now seeking to expand. San Bernardino has now completed the first project, and funds from the sale of the property—which involve the court taking control of a property where the owner is unresponsive and appointing a receiver to fix it up—is then used to reimburse the receiver, the city, and others involved in the process, so that there is no cost to the city. From June 2011 to August 2015, the city issued 14 notices and several times secured the property where yesterday’s open house was held, with Deputy City Attorney Lauren Daniels noting the house had gone into foreclosure and become bank-owned: “We sent countless notices to the holder of the mortgage and trust, because there were issues of squatters, and schoolchildren at Serrano (Middle School) were nearby and they would come to the house…With the hazardous swimming pool, hazardous pieces of the ceiling coming off — there were numerous code violations.” The result: one year after the first San Bernardino house completed the receivership process, neighbors say it is still making a world of difference—or as one neighbor yesterday described it: “Peace and safety has been restored to our neighborhood, because of what the city did to our neighborhood. It’s a very, very good program.”

Unlocking a Municipality’s Fisc. The small Florida municipality of Opa-locka, which Florida Gov. Rick Scott declared on the first of this month to be in a state of financial emergency, now is also under investigation by the Securities and Exchange Commission, with the SEC requesting documents and emails relating to municipal bonds the city issued for the May 2015 purchase of an $8 million building. The federal probe came as Melinda Miguel, Florida’s Inspector General, whom Gov. Scott named to take responsibility for state fiscal oversight, convening her panel for its first meeting yesterday—and at which Acting City Manager Yvette Harrell, in giving the state financial emergency board an overview of the city’s finances, described Opa-locka’s fiscal situation as “dire,” noting: “We have an important job here to do.” That is a task, no doubt, made more difficult, because it marks the second state fiscal takeover of the municipality—so one key task will be to determine in what ways the first state takeover failed to produce long-term fiscal stability. In her presentation yesterday, Ms. Harrell told the state board of recently discovered information which appears to demonstrate that the city failed to budget a “$1.7 million prior debt obligation required to keep the city moving.” Ms. Harrell added that Opa-locka had: failed to budget extra money for staff it hired; that the city continued to budget and spend revenues it would not receive even though property values declined; and that the cash-flow deficit has fluctuated wildly, from $1.42 million to $4.5 million to $1.89 million in a matter of weeks—adding that the city needed help to “figure out where we are.” She noted that some key steps would involve enhancing efforts to collect past-due bills, although, with the city inside Miami-Dade County, a county with its own experience once on the brink of municipal bankruptcy, but today experiencing a booming economy and rapidly rising property values, a critical issue for Opa-locka is to get a handle on why it has been experiencing a consistent decrease in property values by as much as 60 percent.

For her part, IG Miguel named appointees to committees to examine different aspects of the city’s budgets and contracts, as she presses to meet an August 1st deadline for the board to submit a financial plan to Governor Scott—a task no doubt made even more challenging since Opa-locka has yet to begin work on its 2015 audit. Thus, unsurprisingly, questions were raised during the financial board meeting about the need to hire a new, independent auditor. The city had total long-term debt outstanding of $11.6 million, including $6.56 million of revenue bonds placed with a financial institution and state loans, according to its most recent, FY2014 audit. A financial assessment conducted by Miami-Dade County Auditor Cathy Jackson earlier this year found that as the city’s fiscal crisis had worsened, there were numerous irregularities with the city’s use of restricted funds, including debt service reserves—reserves which the Miami Herald last week reported the city had dipped into to cover payroll expenses—a disclosure which the city manager yesterday omitted to inform the financial emergency board.

The Pressure of Looming Deadlines in Municipa Finance

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eBlog, 6/22/16

In this morning’s eBlog, we explore the difficult transition challenge in Detroit of the state’s public school system after 7 years of state control back to the city; we observe the deteriorating fiscal collapse of the small municipality of Opa-locka, Florida; and we observe the increasingly frantic negotiations, threats, and litigation in Puerto Rico as its big deadline approaches the week after next.

Public Schooling on Municipal Bankruptcy. Detroit Public Schools Emergency Manager and retired U.S. Bankruptcy Judge Steven Rhodes plans to meet with both Michigan officials and Detroit families this week to explain and discuss the implementation of the state’s $167 million “rescue” plan for the Detroit Public Schools (DPS) which Gov. Rick Snyder signed into law yesterday—which includes $467 million in debt relief and $150 million in start-up costs for creation of a new debt-free school district—at a meeting today at which key players from Gov. Rick Snyder’s office, the state Treasury, and the Michigan Department of Education are expected. Under the new laws, the school district will be divided on July 1 into two corporations as part of this plan enacted to prevent the system from filing for municipal bankruptcy: The existing DPS district will stay intact for tax-collection purposes to retire $617 million in debt over 8½ years, including $150 million for transitional startup costs to launch a new district and to ensure it has enough cash flow to operate. The new district, which will receive the $617 million infusion of state funds to cover the lost tax revenue, will educate students. A new school board will be elected in November, and a commission of state appointees that oversees city budgets will also review the schools’ finances. The new law splits the old DPS in two, leaving the old entity to pay off debt through existing millage, while a new debt-free district will receive its full state funding allowance to focus on education. Judge Rhodes is expected to serve as an official “transition manager” for the newly created school district. Under the legislation, the transition manager would run Detroit schools until new school board members take office next January after November’s elections. Judge Rhodes wants to ensure everyone “is on the same page as it relates to knowledge” of the legislation, so that participants can begin working together on a project management plan to implementing the state assistance package and launch of a new Detroit Public Schools Community District.

The learning curve will be challenging: the state assistance plan was adopted on a partisan vote without a single vote of any Detroit legislator: the greatest challenge is likely to be with regard to charter school proliferation in the city and the growing percentage of special education students who attend the traditional public school district. Because the new state law omits a proposed commission which would have had governing authority with regard to the placement of traditional and charter schools in the city, there are expected to be significant challenges for the new DPS. Indeed, Michigan Education Superintendent Brian Whiston yesterday noted: “The conversation isn’t going away,” adding that charter school proliferation is also causing challenges for other urban school districts in Saginaw, Benton Harbor, and Pontiac—or, as Mr. Whiston described it: work creatively to get more funding (for DPS) if we have to…and also to look at how we manage the opening and closing of schools — to do it in a way that provides parents’ choices, which is important, but also in a way that we manage those choices.” (One of the newly enacted state DPS provisions directs the state to develop an “A-to-F” grading system, so Detroit parents can better decide which schools, whether traditional or charter, are the best.

Will There Be a State Bailout? Opa-locka, Florida leaders have met in an effort to address critical financial crises which threaten to plunge the small municipality into municipal bankruptcy—with Commissioners voting earlier this week to dip into resources in the city’s wastewater reserve fund to make payroll this week—even as the small municipality has stopped payments to mechanics who work to keep the municipality’s old police cars working: Opa-locka is over $1 million in debt. But even that debt seems to pale compared to the growing, day-to-day challenge of operating, a challenge so severe the city commission had felt compelled to dip into the municipality’s sewer fund reserves. Florida’s Gov. Rick Scott has already declared a state of emergency for the city—and now recognizes it might have to act to bail the city out. Even the city’s governance has been challenged, with the commission appointing former mayor John Riley to fill an open commission seat after former commissioner Terence Pinder killed himself—as he was confronting bribery charges. The new Commissioner Riley told his colleagues: “First of all, I want to really find out the status of the city and what’s been done and what’s not been done.”

Tropical Fiscal Storm. Hedge funds Jacana Holdings, Lex Claims, MPR Investors, and RRW I yesterday filed suit in federal court in New York, seeking to have the federal court bar Puerto Rico from using its April-adopted Puerto Rico Emergency Moratorium and Financial Rehabilitation Act for its general obligation bonds—and to seek the court’s intervention to mandate that Puerto Rico prioritize the payment of the it general obligation (GO) bonds.  (The plaintiffs filing currently hold bonds from Puerto Rico’s $3.5 billion 2014 GO bond sale—municipal bonds for which the bond’s indentures specify the underlying bonds are to be governed by New York law and use New York’s courts to resolve disputes.) The suit charges that “Governor Alejandro García Padilla has willfully violated the first priority guaranteed to general obligation bonds by Puerto Rico’s constitution and has flouted centuries-old federal constitutional protections for contract and property rights…,” adding that the “Moratorium Act is transparently unlawful.” Unsurprisingly—and even as the U.S. Senate could act by as early as next week to take up and consider the House-passed PROMESA legislation—the U.S. territory of Puerto Rico decried the resort to litigation as a failure to “continue good faith negotiations…” much less to “acknowledge the reality of the commonwealth’s fiscal crisis: This attempt by hedge funds to disrupt the commonwealth’s ability to keep the lights on and provide essential services for the 3.5 million Americans on the island makes clear that the Senate must act and pass PROMESA before July 1.”

In filing suit—rather than awaiting Congressional action or working for good faith resolution, the plaintiffs, in their filing, charged that the “Puerto Rico legislature lacks the legislative authority to modify New York’s law of contracts…,” adding that “In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid,” but also adding that Puerto Rico’s Moratorium Act breaks the contract and due process clauses of the U.S. constitution. The filing occurs in the midst not only of Congressional action, but also confidential creditor debt negotiations, including with some of the litigants and other holders and insurers of Puerto Rico GO and Sales Tax Finance Corp. (COFINA) debt—negotiations which the Puerto Rico Government Development Bank yesterday reported had broken down.

Yesterday’s hedge fund suit followed in the wake of a growing pile of suits against Puerto Rico: last month hedge funds holding more than $750 million of the debt of the GDB revived a lawsuit, accusing the U.S. territory’s government of “changing the rules of the game” by amending the Moratorium Act, seeking in the revived litigation to overturn the Moratorium Act and Law 40, which Puerto Rico amended last month. Last week, municipal bond insurer National Public Finance Guarantee sued Puerto Rico in the U.S. District Court for the District of Puerto Rico, seeking to overturn the Moratorium Act. The resort to federal court likely emerges from both the faltering confidential talks with some of Puerto Rico’s municipal bondholders, as well as perceptions that litigation might produce a richer outcome for hedge funds than the pending PROMESA legislation likely headed to the signature of President Obama. All this comes as the proverbial clock is running down to next week’s deadline for Puerto Rico to pay $2 billion it does not have in interest and principal due on a variety of securities, which Governor Alejandro Garcia Padilla has made clear Puerto Rico cannot pay in full. Bloomberg reported that Puerto Rico’s benchmark general-obligation bonds traded yesterday at about 66 cents on the dollar to yield 12.8 percent.