Municipal Challenges from State Control & Preemption of Local Authority


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eBlog, 1/0917

Good Morning! In this a.m.’s eBlog, we consider more outcomes from the Flint drinking water crisis—outcomes which raise issues with regard to the State of Michigan’s Emergency Manager law—and accountability, before taking a run to Atlantic City, a municipality in the midst of a state takeover, and, now, apparently caught between state-mandates to reduce police capacity amid an apparent dramatic surge in public safety concerns. Finally, we note a challenge to the Municipal Securities Rulemaking Board’s so-called pay-to-play rules, under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions.

Out Like Flint. Michigan Gov. Rick Snyder Friday signed into law new state legislation mandating municipalities in the state to warn residents of dangerous lead levels in drinking water within three days’ notification by the state of contamination, marking the enactment of the first piece of legislation stemming from the Flint water crisis. Gov. Snyder described it as an “important step…This is not the last piece of legislation we should see on this. This is a good start of getting faster notification to the public when there is a water issue.” The bill, sponsored by state Rep. Sheldon Neeley (D-Flint), a former Flint council member, is aimed at strengthening water quality control in Michigan to ensure a water crisis such as Flint’s will not happen in a Michigan municipality again, or, as Rep. Neeley put it: “The water crisis in Flint has left the community and its allies reeling with a sense of urgency, and rightfully so…During this difficult time, I have valued the governor’s partnership in helping to steward legislation that will have a positive impact on the residents of Flint.” Previously, owners or operators of municipal water plants were legally required to notify customers of any noncompliance with state drinking water standards, within 30 days, according to the representative; now, under the new law, operators must issue a public advisory within three business days of notification from the Michigan Department of Environmental Quality. Such alerts may be disseminated via radio or television, notices delivered to customers or advisories posted in conspicuous areas throughout the community. The bill had been adopted unanimously in both the Michigan House and Senate. The new state law comes in the wake of criminal charges filed against more than a dozen government officials related to the Flint water crisis. Last month, the Michigan Attorney General’s Office filed criminal charges against former Flint emergency manager Darnell Earley, former emergency manager Gerald Ambrose, and two former city public works employees. Mr. Earley had served as Flint’s emergency manager from 2013-15, before going on to be named by Gov. Snyder as Emergency Manager for the Detroit Public Schools, where he resigned nearly a year ago in the face of severe criticism. Mr. Earley, who had refused to testify about his role and responsibility with regard to the Flint drinking water crisis, was subsequently charged with false pretenses, conspiracy to commit false pretenses, misconduct in office, and willful neglect of duty while in office–charges which carry up to 20 years in prison.

Recent testing of Flint water suggests lead levels have dropped, but residents in the city of roughly 100,000 residents continue to rely on bottled and filtered water for their daily needs.

A City’s Fiscal and Physical Safety. According to a review of crime data by The Press of Atlantic City, the two-decade long decline in crime in Atlantic city has not only halted, but reversed itself in 2015, according to the Press’s review of New Jersey state crime data, reporting that in 2015, crime increased in nearly every major category, including homicides, rapes, and aggravated assaults—with the homicide increase extending into last year. The city’s violent crime rate is more than 500 percent higher than the statewide average—the murder rate a thousand percent—posing a stark governing challenge as, last week, New Jersey’s Local Finance Board, which is managing the city, alerted the city’s police and fire unions that it would press drastic cuts, including reduced staffing and imposing longer shifts. The Board has the authority to hire and fire employees, authorize raises and promotions, renegotiate service and labor contracts, restructure or pay off debt, approve the municipal budget, and make changes with regard to the delivery of municipal services. The state is seeking to force a restructuring of the city’s police department, including salary reductions, higher health care benefit contributions, moving to 12-hour shifts, and a more aggressive police response to nuisance issues in neighborhoods. Nevertheless, Anthony Marino, a retired executive with the South Jersey Transportation Authority, who has studied Atlantic City’s crime figures, reports that crime statistics have been on the wane since a high in 1989 and that the trend shows Atlantic City is, for the most part, a reasonably safe city, noting that in 1977, before the city had casinos, its crime index, or the total number of the seven categories tracked by State Police, was 4,391. In 1989, it peaked at over 16,000 before declining almost annually. Nevertheless, the apparent turnaround—in addition to the state-mandated changes in the city’s police department could not only limit the city’s capacity to address the seeming turnaround, but also adversely affect tourism and assessed property values.

Paying to Play. Tennessee and Georgia Republican groups are challenging the Municipal Securities Rulemaking Board’s (MSRB) so-called pay-to-play rules under which municipal advisors and broker-dealer firms would be mandated to wait two years before doing business with municipal entities to which they have made political contributions (the pay-to-play rule also prohibits an investment adviser from soliciting contributions for a government official or the official’s political party at the same time the adviser is providing services to the government entity for which the official works.). The two political organizations have filed the suits charging that the rules violate their First Amendment rights; in addition, they claim that the Securities and Exchange Commission (SEC) and MSRB exceeded their authority and have not demonstrated a sufficient legal interest in restricting political contributions. In response, the Campaign Legal Center, in its brief to the 6th U.S. Court of Appeals, argues the rules are important to prevent municipal advisors from engaging in pay-to-play practices—and the rules are needed to address the potential for corruption in the municipal market. The amicus brief opposes attempts by the Tennessee Republican Party, Georgia Republican Party, and New York Republican State Committee seeking to have the court vacate the SEC’s approval of the rule changes.

Last summer, the SEC issued notice that it intends to approve the rules proposed by the MSRB and the Financial Industry Regulatory Authority, noting it would issue orders finding that the self-regulatory organizations’ rules impose “substantially equivalent or more stringent restrictions” on municipal advisors and broker-dealers than its own pay-to-play rule. The Center’s brief notes: “Substantial campaign contributions from a municipal advisor to officeholders with control over awards of municipal advisory business are likely to give rise to quid pro quo exchanges, or at a minimum, the appearance of such exchanges…That is the premise not only of the challenged amendments, but also the underlying rule, which was upheld by the D.C. Circuit.” Under the proposed changes to the rule, municipal advisors, like dealers, are barred from engaging in municipal advisory business with a municipal issuer for two years if the firm, one of its professionals, or a political action committee controlled by either the firm or an associated professional, makes significant contributions to an issuer official who can influence the award of municipal advisory business. As proposed, the modified rule contains a de minimis provision, which allows a municipal finance professional associated with a dealer or a municipal advisor professional to make a contribution of up to $250 per election to any candidate for whom she or he can vote without triggering the two-year ban. This is not a first: there was a previous challenge to an earlier version of Rule G-37 by an Alabama bond dealer in Blount v. SEC after it was first approved for dealers in 1994—a challenge which the U.S. Court of Appeals for the D.C. Circuit rejected, noting, in its opinion, the rule had been “narrowly tailored to serve a compelling government interest.”

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

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eBlog, 11/04/16

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

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

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

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

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

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

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

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

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

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