State Oversight & Severe Municipal Distress

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eBlog, 04/24/17

Good Morning! In this a.m.’s eBlog, we consider the unique fiscal challenge confronting Detroit: when and how will it emerge from state oversight? Then we spin the tables to see how Atlantic City is faring to see if it might be on the shores of fiscal recovery; before going back to Detroit to assess the math/fiscal challenges of the state created public school district; then, still in Detroit, we try to assess the status of a lingering issue from the city’s historic municipal bankruptcy: access to drinking water for its lowest income families; before visiting Hartford, to try to gauge how the fiscally stressed central city might fare with the Connecticut legislature. Finally, we revisit the small Virginia municipality of Petersburg to witness a very unique kind of municipal finance for a city so close to insolvency but in need of ensuring the provision of vital, lifesaving municipal services. 

Fiscal & Physical Municipal Balancing. Michigan Deputy Treasurer Eric Scorsone is predicting that by “early next year, Detroit will be out of state oversight,” at a time when the city “will be financially stable by all indications and have a significant surplus.” That track will sync with the city’s scheduled emergence from state oversight, albeit apprehension remains with regard to whether the city has budgeted adequately  to set funds aside to anticipate a balloon pension obligation due in 2024. Nevertheless, Mr. Scorsone has deemed the Motor City’s post-bankruptcy transformation “extraordinary,” describing its achievements in meeting its plan of debt adjustment—as well as complying with the Detroit Financial Review Commission—so well that the “city could basically operate on its own.” He noted that the progress has been sufficient to permit the Commission to be in a dormancy state—subject to any, unanticipated deficits emerging. The Deputy Treasurer credited the Motor City’s strong management team under CFO John Hill both for the city’s fiscal progress, but also for his role in keeping an open line of communication with the state oversight board; he also noted the key role of Mayor Mike Duggan’s leadership for improving basic services such as emergency response times and Detroit’s public infrastructure. Nevertheless, Detroit remains subject to the state board’s approval of any contracts, operating or capital budgets, as well as formal revenue estimates—a process which the Deputy Treasurer noted “allows the city to stay on a strong economic path…[t]hese are all critical tools,” he notes, valuable not just to Detroit, but also to other municipalities an counties to help ensure “long term stability.”

On the Shore of Fiscal Recovery. S&P Global Ratings, which last month upgraded Atlantic City’s general obligation bond rating two notches to CCC in the wake of the city’s settlement with the Borgata Casino, a settlement which yielded the city some $93 million in savings, has led to a Moody’s rating upgrade, with the credit rating agency writing that Atlantic City’s proposed FY2017 budget—one which proposes some $35.3 million in proposed cuts, is a step in the right direction for the state taken-over municipality, noting that the city’s fiscal plan incorporates a 14.6% cut in its operating budget—sufficient to save $8 million, via reductions in salaries and benefits for public safety employees, $6 million in debt service costs, and $3 million in administrative expenses. Nevertheless S&P credit analyst Timothy Little cautioned that pending litigation with regard to whether Atlantic City can make proposed police and firefighter cuts could be a fly in the ointment, writing: “In our view, the proposed budget takes significant measures to improve the city’s structural imbalance and may lead to further improved credit quality; however, risks to fiscal recovery remain from pending lawsuits against state action impeding labor contracts.” The city’s proposed $206.3 million budget, indeed, marks the city’s first since the state takeover placed it under the oversight of the New Jersey’s Local Finance Board, with the state preemption giving the Board the authority to alter outstanding debt, as well as municipal contracts. Mr. Little wrote that this year will mark the first fiscal year of the agreed-to payment-in-lieu-of-taxes (PILOT) program for casino gaming properties—a level set at $120 million annually over the next decade—out of which 10.4% will go to Atlantic County. Mr. Little also notes that the budget contains far less state financial support than in previous years, as the $30 million of casino redirected anticipated revenue received in 2015 and 2016 will be cut to $15 million; moreover, the budget includes no state transitional aid—denoting a change or drop of some $26.2 million; some of that, however, will be offset by a $15 million boost from an adjustment to the state Consolidated Municipal Property Tax Relief Act—or, as the analyst wrote: “Long-term fiscal recovery will depend on Atlantic City’s ability to continue to implement fiscal reforms, reduce reliance on nonrecurring revenues, and reduce its long-term liabilities.” Today, New Jersey state aid accounts for 34% of the city’s $206.3 million in budgeted revenue, 31% comes from casino PILOT payments, and 27% from tax revenues. S&P upgraded Atlantic City’s general obligation bond rating two notches to CCC in early March after the Borgata settlement yielded the city $93 million in savings. Moody’s rates Atlantic City debt at Caa3.

Schooled on Bankruptcy. While Detroit, as noted above, has scored high budget marks or grades with the state; the city’s school system remains physically and fiscally below grade. Now, according to the Michigan Department of Education, school officials plan to voluntarily shutter some of the 24 city schools—schools targeted for closure by the state last January, according to State Superintendent Brian Whiston, whose spokesperson, William DiSessa, at a State Board of Education meeting, said:  “Superintendent Whiston doesn’t know which schools, how many schools, or when they may close, but said that they are among the 38 schools threatened for closure by the State Reform Office earlier this year.” Mr. DiSessa added that “the decision to close any schools is the Detroit Public School Community District’s to make.” What that decision will be coming in the wake of the selection of Nikolai Vitti, who last week was selected to lead the Detroit Public Schools Community District. Mr. Vitti, 40, is currently Superintendent of the Duval County Public Schools in Jacksonville, Florida, the 20th largest district in the nation; in the wake of the Detroit board’s decision last week to enter into negotiations with Mr. Vitti for the superintendent’s job, Mr. Vitti described the offer as “humbling and an honor.” The school board also voted, if Mr.Vitti accepts the offer, to ask him to begin next week as a consultant, working with a transition team, before officially commencing on July 1st. The School Board’s decision, after a search began last January, marks the most important decision the board has made during its brief tenure, in the wake of its creation last year and election last November after the Michigan Legislature in June approved $617-million legislation which resolved the debt of Detroit Public Schools via creating the new district, and retaining the old district for the sole purpose if collecting taxes and paying off debt.

The twenty-four schools slated for closure emerged from a list of 38 the State of Michigan had targeted last January—all from schools which have performed in the bottom 5 percent of the state for at least three consecutive years, according to the education department. The Motor City had hoped to avoid any such forced state closures—hoping against hope that by entering last month into partnership negotiations with the Michigan State Superintendent’s office, and working with Eastern Michigan University, the University of Michigan, Michigan State University, and Wayne State University, the four institutions would help set “high but attainable” goals at the 24 Detroit schools to improve academic achievement and decrease chronic absenteeism and teacher vacancies. The idea was that those goals would be evaluated after 18 months and again in 36 months, according to state officials. David Hecker, president of the American Federation of Teachers Michigan, noted that he was not aware which schools might be closing or how many; however, he noted that whatever happens to the teachers of the closing schools would be subject to the collective bargaining agreement with the Detroit Federation of Teachers. “If any schools close, it would absolutely be a labor issue that would be governed by the collective bargaining agreement as to how that will work … (and) where they will go,” Mr. Hecker said. “We very strongly are opposed to any school closing for performance reasons.”

Thirsty. A difficult issue—among many—pressed upon now retired U.S. Bankruptcy Judge Steven Rhodes during Detroit’s chapter 9 municipal bankruptcy came as the Detroit Water and Sewer Department began shutting off water service to some of nearly 18,000 residential customers with delinquent accounts. Slightly less than a year ago, in the wake of numerous battles in Judge Rhodes’ then U.S. bankruptcy courtroom, the issue was again raised: what authority did the city of Detroit have to cut off the delivery of water to the thousands of its customers who were delinquent by more than 90 days? Thus it was that Detroit’s Water and Sewerage Department began shutting off service to customers who had failed to pay their bills—with, at the time, DWSD guesstimating about 20,000 of its customers had defaulted on their payments, and noting that the process of shutting off service to customers with unpaid bills was designed to be equitable and not focused on any particular neighborhood or part of the city—and that the agency was not targeting customers who owed less than a $150 and were only a couple of months behind, noting, instead: “We’re looking for those customers who we’ve repeatedly tried to reach and make contact,” as well as reporting that DWSD was reminding its delinquent customers who were having trouble paying their water bills to contact the department so they may be enrolled in one of its two assistance programs — the WRAP Fund or the “10/30/50” plan. Under the first, the WRAP Fund, customers who were at 150 percent of the poverty level or below could receive up to $1,000 a year in assistance in paying bills, plus up to $1,000 to fix minor plumbing issues leading to high usage. This week, DWSD is reporting it has resumed shutoffs in the wake of sending out notices, adding the department has payment and assistance plans to help those with delinquent accounts avoid losing service. Department Director Gary Brown told the Detroit Free Press that everyone “has a path to not have service interruption.” Indeed, it seems some progress has been achieved: the number of families facing shutoffs is down from 24,000 last April and about 40,000 in April of 2014, according to The Detroit News. In 2014, DWSD disconnected service to more than 30,000 customers due to unpaid bills, prompting protests over its actions. Nonetheless, DWSD began the controversial practice of shutting off water service again this week, this time to some of the nearly 18,000 residential customers with delinquent accounts, in the wake of notices sent out 10 days earlier, according to DWSD Director Gary Brown. Nevertheless, while 17,995 households are subject to having their water turned off, those residents who contact the water department prior to their scheduled shutoffs to make a payment or enter into an assistance plan will avoid being cut off—with experience indicating most do. And, the good gnus is that the number of delinquent accounts is trending down from the 24,302 facing a service interruption last April, according to DWSD. Moreover, this Solomon-like decision of when to shut off water service—since the issue was first so urgently pressed in the U.S. Bankruptcy Court before Judge Rhodes—has gained through experience. DWSD Director Brown reports that once residents are notified, about 90 percent are able to get into a plan and avoid being shut off, and adding that most accounts turned off are restored within 24 hours: “Every residential Detroit customer has a path not to be shut off by asking for assistance or being placed into a payment plan…I’m urging people not to wait until they get a door knocker to come in and ask for assistance to get in a payment plan.” A critical part of the change in how the city deals with shutoffs comes from Detroit’s launch two years ago of its Water Residential Assistance Program, or WRAP, a regional assistance fund created as a component of the Great Lakes Water Authority forged through Detroit’s chapter 9 municipal bankruptcy: a program designed to help qualifying customers in Wayne, Oakland, and Macomb counties who are at or below 150 percent of the federal poverty level—which equates to $36,450 for a family of four—by covering one-third of the cost of their average monthly bill and freezing overdue amounts. Since a year ago, nearly $5 million has been dedicated to the program—a program in which 5,766 Detroit households are enrolled, according to DWSD, with a retention rate for those enrolled in the program of 90 percent. DWSD spokesperson Bryan Peckinpaugh told the Detroit News the department is committed to helping every customer keep her or his water on and that DWSD provides at least three advance notifications encouraging those facing a service interruption to contact the department to make payment arrangements, adding that the outreach and assistance efforts have been successful, with the number of customers facing potential service interruption at less than half of what it was three years ago.

Fiscally Hard in Hartford. Hartford Mayor Luke Bronin has acknowledged his proposed $612.9 FY2018 budget includes a nearly $50 million gap—with proposed expenditures at $600 million, versus revenues of just over $45 million: a fiscal gap noted moodily by four-notch downgrades to the Connecticut city’s general obligation bonds last year from two credit rating agencies, which cited rising debt-service payments, higher required pension contributions, health-care cost inflation, costly legal judgments from years past, and unrealized concessions from most labor unions. Moody’s Investors Service in 2016 lowered Hartford GOs to a junk-level Ba2. S&P Global Ratings knocked the city to BBB from A-plus, keeping it two notches above speculative grade. Thus, Mayor Bronin, a former chief counsel to Gov. Daniel Malloy, has repeated his request for state fiscal assistance, noting: “The City of Hartford has less taxable property than our suburban neighbor, West Hartford. More than half of our property is non-taxable.” In his proposed “essential services only” budget, Mayor Bronin is asking the Court of Common Council to approve an increase of about $60 million, or 11%, over last year’s approved budget—with a deadline for action the end of next month. An increasing challenge is coming from the stressed city’s accumulating debt: approximately $14 million, or 23%, of that increase is due to debt-service payments, while $12 million is for union concessions which did not materialize, according to the Mayor’s office. Gov. Malloy’s proposed biennial budget, currently in debate by state lawmakers, proposes $35 million of aid to Hartford. Unsurprisingly, that level is proving a tough sell to many suburban and downstate legislators. On the other hand, the Mayor appears to be gaining some traction after, last year, gaining an agreement with the Hartford Fire Fighters Association that might save the city $4 million next year: the agreement included changes to pension contributions and benefits, active and retiree health care, and salary schedules. In addition, last month, Hartford’s largest private-sector employers—insurers Aetna Inc., Travelers Cos. and The Hartford—agreed to donate $10 million per year to the city over five years. Nonetheless, rating agencies Moody’s and S&P have criticized the city for limited operating flexibility, weak reserves, narrowing liquidity, and its rising costs of debt service and pension obligations. Gurtin Municipal Bond Management went so far as to deem the city a “slow-motion train wreck,” adding that while the quadruple-notch downgrades had a headline shock effect, the city’s fundamental credit deterioration had been slow and steady. “The price impact of negative headlines and credit rating downgrades can be swift and severe, which begs the question: How should municipal bond investors and their registered investment advisors react?” Gurtin’s Alex Etzkowitz noted, in a commentary. “The only foolproof solution is to avoid credit distress in the first place by leveraging independent credit research and in-depth, ongoing surveillance of municipal obligors.”

Fighting for a City’s Future. The small city of Petersburg. Virginia, is hardly new to the stress of battle. It was there that General Robert E. Lee’s men fought courageously throughout the Overland Campaign, even as Gen. Lee feared he confronted a campaign he feared could not be won, warning his troops—and politicians: “We must destroy this Army of Grant’s before he gets to the James River. If he gets there, it will become a siege, and then it will be a mere question of time.” Yet, even as he wrote, General Ulysses S. Grant’s Army of the Potomac was racing toward the James and Petersburg to wage an attack on the city—a highly industrialized city then of 18,000 people, with supplies arriving from all over the South via one of the five railroads or the various plank roads. Indeed, Petersburg was one of the last outposts: without it, Richmond, and possibly the entire Confederacy, was at risk. Today, the city, because of the city’s subpar credit rating, is at fiscal risk: it has been forced to beg its taxpayers to loan it funds for new emergency vehicles—officials are making a fiscal arrangement with private citizens to front the cost for new emergency vehicles, and offering to put up city hall as collateral for said arrangement, as an assurance to the lenders they will be paid back. The challenge: the police department currently needs 16 new vehicles, at a cost of $614,288; the fire department needs three new trucks, at a cost of $2,145,527. Or, as Interim City Manager Tom Tyrrell notes: “Every single day that a firefighter rolls out on a piece of equipment older than he is, or a police officer responds to an emergency call in a car with 160,000 miles on it, are days we want to avoid…We want to get this equipment as soon as possible.” Interim City Finance Director Nelsie Birch has included in the upcoming fiscal year budget the necessary funds to obtain the equipment—equipment Petersburg normally obtains via lease agreements with vendors, but which now, because of its inability to access municipal credit markets due to its “BB” credit rating with a negative outlook, makes it harder than ever to find any vendor—or, as Manager Tyrrell puts it: “We went out four different times…We solicited four different times to the market, and were unsuccessful in getting any parties to propose.” He added that when soliciting these types of agreements, you solicit “thousands of people.” Notwithstanding that the funds for the vehicles is already set aside in the upcoming budget, city officials have been unable to find anyone willing to enter into a lease agreement with the city because of the city’s financial woes.

Last week, the City Council authorized Mr. Tyrrell to “undertake emergency procurement action” in order for the lease of necessary fire and police vehicles, forcing Mr. Tyrrell and other officials to seek private funds to get the equipment—that is, asking individual citizens who have the financial means to put up money for the fire and police vehicles—or, as Mr. Tyrrell puts it: “We’ve reached out to four people, who are interested and capable,” noting they are property owners in Petersburg who will remain anonymous until the deal is closed, describing it thusly: “[This agreement] is outside the rules, because we couldn’t get a partner inside the rules.” Including in this proposed fiscal arrangement: officials must put up additional collateral, in addition to the cars themselves, and in the form of city-owned property—with the cornerstone of the proposal, as it were, being Petersburg City Hall, or, as Mr. Tyrrell notes: “What they’re looking for is some assurance that no matter what happens, we’re going to pay the note…It’s not a securitization in the financial sense, as much as it is in the emotional sense: they know that the city isn’t going to let it go.” He adds, the proposed financial arrangement will be evaluated in two areas: the interest rate and how fast the deal can close, adding: “Although it’s an emergency procurement, we still want to get the best deal we can.”

Municipal Fiscal Accountability

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eBlog, 03/31/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing recovery efforts in Atlantic City after its “lost decade,” before venturing inland to one of the nation’s oldest cities, Wilkes-Barre, Pennsylvania (founded in 1769) as it confronts the challenges of an early state intervention program, and, finally, to Southern California, where the City of Compton faces singular fiscal distrust from its citizens and taxpayers.  

A Lost Fiscal Decade? Atlantic City’s redevelopment effort appears to be gathering momentum following a “lost decade” which featured the closing of five casinos, a housing crisis and major recession, according to a new report released by the South Jersey Economic Review, with author Oliver Cooke writing: “The fact remains that Atlantic City’s redevelopment will take many years…The impact of the local area’s economy’s lost decade on its residents’ welfare has been stark.” The study finds the city to be in recovery—to be stable, but that it is still in critical condition with some work to do.  Nevertheless, its vital signs from developers and its improving economy are all good: that is, while the patient may not regain all its previous strength and capability,  it can thrive: it is “over(cost),” and needs to lose some of the fat it built up by going on a (budget) diet—a road to recovery which will remain steep and tortuous, because it lacks the fiscal capacity it had 15 or 20 years ago—and has to slim down to reflect it.  That is, the city will have to stress itself more in order to get better.  

The analysis, which was conducted in conjunction with the William J. Hughes Center for Public Policy at Stockton University, notes that vital signs from developers and its improving economy are in good condition—maybe even allowing the city to thrive, even if it is unable to regain all its previous strength and fiscal capacity—put in fiscal cookbook terms: Atlantic City is over(cost)weight and needs to lose some of the fat it built up by going on a (budget) diet.  The report also noted that Atlantic City is on track with some positive developments, including the decision at the beginning of this month by Hard Rock International to buy and reopen the closed Trump Taj Mahal property, as well as a recent $72 million settlement with the Borgata Hotel Casino & Spa related to $165 million in owed tax refunds. Mr. Cooke also highlighted other high-profile projects underway, including the reopening of the Showboat casino by developer Bart Blatstein and a $220 million public-private partnership for a new Stockton University satellite residential campus. Nonetheless, he warned that Atlantic City still faces a deep fiscal challenge in the wake of the loss to the city’s metropolitan area of more than 25,000 jobs in the last decade—and its heavy burden of $224 million in municipal bond debt, tied, in large part, to casino property tax appeals. Ultimately, as the ever insightful Marc Pfeiffer of the Bloustein Local Government Research Center and former Deputy Director with the state Division of Local Government Services, the city’s emergence from state control and fiscal recovery will depend on the nuances of the that relationship and whether—in the end—the state imposed Local Finance Board acts with the city’s most critical interests at heart.  

Don’t Run Out of Cash! Wilkes-Barre, first incorporated as a Borough in 1806, is the home of one of Babe Ruth’s longest-ever home runs. It became a city in 1871: today it is a city of over 40,000, but one which has been confronted by constant population decline since the 1930s: today it is less than half the size it was in 1940 and around two-thirds the size it was in 1970. It is a most remarkable city, made up of an extraordinary heritage of ethnic groups, the largest of which are: Italian (just over 25%), Polish (just under 25%), Irish (21%), German (17.9%) English (17.1%) Welsh (16.2%) Slovak (13.8%); Russian (13.4%); Ukranian (12.8%); Mexican (7%); and Puerto Rican (6.4%). (Please note: my math is not at fault, but rather cross-breeding.) Demographically, the city’s citizens and families are diverse: with 19.9% under the age of 18, 12.6% from 18 to 24, 26.1% from 25 to 44, 20.8% from 45 to 64, and 20.6% who are 65 years of age or older. The city has the 4th-largest downtown workforce in the state of Pennsylvania; its family median income is $44,430, about 66% of the national average, and an unemployment rate of just under 7%. The municipality in 2015 had a poverty rate of 32.5%, nearly double the statewide average. Last year, the City of Wilkes-Barre was awarded a $60,000 grant through the Pennsylvania Department of Economic Development (DCED) Early Intervention Program (EIP) to develop a fiscal, operational and mission management 5 year plan for the city—from which the city selected Public Financial Management (PFM) as its consultant to assist in working with the city on its 5 year plan—and from which the city has since received PFM’s Draft Financial Condition Assessment and Draft Financial Trend Forecasting related to the city’s 5 year plan. As part of the intervention, two internal committees were created to develop new sources of revenue for the city. The Revenue Improvement Task Force is comprised of employees from Finance, Tax, Health, Code, and Administration and was directed to analyze and improve upon existing revenue streams; the Small Business Task Force was designed to develop guidance for those interested in opening small businesses in Wilkes-Barre and is comprised of employees from Zoning, Health, Code, Licensing, and Administration. Overall, Mayor Anthony “Tony” George and his administration are confident that they have made significant progress is restoring law and order via the city’s goals of strengthening intergovernmental relationships, improving public safety, fixing infrastructure, fighting blight, restoring and improving city services and achieving long-term economic development.

Nevertheless, the quest for fiscal improvement and reliance on consultants has proven challenging: some of PFM’s proposed options to address city finances have caused a stir. City council Chairwoman Beth Gilbert and City Administrator Ted Wampole, for instance, agreed privatizing the ambulance and public works services as a cost-saving measure was one of the most drastic steps proposed by The PFM Group of Philadelphia, with Chair Gilbert noting: “I stand vehemently against any privatization of any of our city services, especially as an attempt to save money;” she warned the city could end up paying more for services in the long run, and residents could receive less than they get now—adding: “If privatization is on the table, then so is quality.” The financial consultant hired last year for $75,000 to assist the city with developing a game plan to fix its finances under the state’s Early Intervention Program was scheduled to present the options at a public meeting last night at City Hall. PFM representatives, paid from the combination of a $60,000 state grant and $15,000 from the city, have appeared before council several times since December.

Gordon Mann, director of The PFM Group, last night warned: “If the gunshot wound to the city’s financial health doesn’t kill it, the cancer will: both need to be treated, but not at the same time…You need to address the bullet wound, and you need to put yourself in the position to address the cancer.” Mr. Mann, at the meeting, provided an update on where the city stands and where it’s going if nothing is done to address the municipality’s structural problems of flat revenues and escalating expenses for pensions, payroll and long-term debt; then he identified a number of steps to stabilize the city and balance its books, beginning with: “Don’t run out of cash,” and “[D]on’t bother playing the blame game and pointing the finger at prior administrations either,…It may not be your fault, but it is your problem.”

Wilkes Barre is not unlike many of Pennsylvania’s 3rd class cities (York, Erie, Easton, etc.), all in varying degrees of fiscal distress, albeit with some doing better than others. The municipal revenues derived from the property tax and earned income tax will simply not sustain a city like Wilkes Barre—that it, unless and until the state’s municipalities have access to collective bargaining/binding arbitration and pension reform: the current, antiquated revenue options leave the state’s municipalities caught between a rock and a hard place. Worse, mayhap, is the increasing rate of privatization—where an alarming trend across the Commonwealth of communities selling off assets (water, sewer, parking, etc.), more often than not to plug capital into pensions, is, increasingly, leaving communities with no assets and with no pension reform facing the same issue in the future. 

Not Comping Compton: Corruption & Fiscal Distress. In Compton, California, known as the Hub City, because of its location in nearly the exact geographical center of Los Angeles County, the City of Compton is one of the oldest cities in the county and the eighth to incorporate.  The city traces its roots to territory settled in 1867 by a band of 30 pioneering families, who were led to the area by Griffith Dickenson Compton—families who had wagon-trained south from Stockton, California in search of ways to earn a living other than in the rapidly depleting gold fields, but where, the day before yesterday, the city’s former deputy treasurer was arrested for allegedly stealing nearly $4 million from the city. FBI agents arrested Salvador Galvan of La Mirada on Wednesday morning, as part of a federal criminal complaint filed Tuesday, alleging that, for six years, Mr. Galvan skimmed about $3.7 million from cash collected from parking fines, business licenses, and city fees: an audit found discrepancies ranging from $200 to $8,000 per day. Mr. Galvan, who has been an employee of the city for twenty-three years, has been charged with theft concerning programs receiving federal funds. If convicted, he could face up to five years in prison. As Joseph Serna and Angel Jennings of the La Times yesterday wrote: “The money adds up to an important chunk of the budget in a city once beset with financial problems and the possibility of [municipal] bankruptcy.” Prosecutors claim that one former city employee saw all these payments as an opportunity, alleging that the former municipal treasurer, over the last six years, skimmed more than $3.7 million from City Hall, taking as much as $200 to $8,000 a day—small enough, according to federal prosecutors, to avoid detection, even as Mr. Galvan’s purchase of a new Audi and other upscale expenses on a $60,000 salary, raised questions.

The arrest marks a setback for the Southern California city which has prided itself in recent years for its recovery from some of the crime, blight, and corruption which had threatened the city with municipal insolvency—or, as Compton Mayor Aja Brown noted: the allegations “challenge the public’s trust.”  Mayor Brown noted the wake-up call comes as the city has been working in recent months to improve financial controls and create new processes for detecting fraud—even as some of the city’s taxpayers question how the city could have missed such criminal activity for so many years. The Los Angeles County Sheriff’s Department had arrested Mr. Galvan last December in the wake of City Treasurer Doug Sanders’ confirmation with regard to “suspicious activity” in a ledger discovered by one of his employees: his position in the city involved responsibility for handling cash: as part of his duties, he collected funds from residents paying their water bills, business licenses, building permits, and trash bills. According to reports, Mr. Galvan maintained accurate receipts of the cash he received for city fees, but he would submit a lower amount to the city’s deposit records and, ultimately, on the deposit slips verified by his supervisors and the banks, according to federal prosecutors. Indeed, an audit which compared a computer-generated spreadsheet tracking money coming in to the city with documents Mr. Galvan prepared made clear that he had commenced skimming cash in 2010—starting slowly, at first, but escalating from less than $10,000 to $879,536 by 2015, a loss unaccounted for in the city’s accounting system. While Mr. Galvan faces a maximum of 10 years in federal prison, if convicted, the city faces a trial of public trust—or, as Mayor Brown, in a statement, notes: “Unfortunately, the actions of one employee can challenge the public’s trust that we strive daily as a City to rebuild…The alleged embezzlement and theft of public funds is an egregious affront to the hard-working residents of Compton as well as to our dedicated employees. The actions of one person does not represent our committed City employees who — like you — are just as disappointed.”

Breaking Up Is Hard to Do.

eBlog, 03/06/17

Good Morning! In this a.m.’s eBlog, we consider the trials and tribulations of really emerging from the largest chapter 9 municipal bankruptcy in American history; then we turn to an alternative to municipal bankruptcy: dissolution.

The Hard Road of Exiting Municipal Bankruptcy: A Time of Fragility. Christopher Ilitch, the Chief Executive Officer of Ilitch Holdings Inc., companies in Detroit which represent leading brands in the food, sports, and entertainment industries (including Little Caesars, the Detroit Red Wings, the Detroit Tigers, Olympia Entertainment, Uptown Entertainment, Blue Line Foodservice Distribution, Champion Foods, Little Caesars Pizza Kit Fundraising Program, and Olympia Development), notes that “We are at a critical time in Detroit’s history,” speaking at the Detroit Regional Chamber’s Detroit Policy Conference: “There’s been no community that’s been through what Detroit has been through. Through the depths, there’s been a lot of choices.” Indeed, as the very fine editor of the Detroit News, Daniel Howeswrote: “There still is, and how they’re made could meaningfully impact Detroit’s arc of reinvention: despite a booming development scene spearheaded now by the Ilitch family’s $1.2 billion District Detroit, Quicken Loans Inc. Chairman Dan Gilbert’s empire-building, more effective policing and a burgeoning downtown scene, four words loom: “We’re not there yet.” Mr. Howes notes that the cost of new construction projects still cannot be fully recouped through commercial and residential rents, adding: “The business climate, including taxes and regulation, still is not as attractive as it could be. And longstanding residents in the city’s neighborhoods worry that the reinvention of downtown and Midtown risks leaving them behind.” Or, as Detroit City Council President Brenda Jones puts it: “We have been talking about downtown and Midtown so much, and we know downtown and Midtown are important…If we are going to subsidize development, we would like to see something in it for us as well.” That is, exiting chapter 9 bankruptcy is not a panacea: one’s city still confronts a steep hill to execute its plan of debt adjustment—and a hill the scaling of which comes at higher borrowing costs than other cities of the same size. That is to say, long-term recovery has to involve the entire community—not just the municipal government. Or, as Mr. Howes notes: “Business leaders stepped in to acquire new police cruisers and EMT trucks, even as some of them finance ‘secondary patrols’ of downtown districts. The moves by General Motors Co. and Gilbert’s Rock Ventures LLC, to name two, to employ off-duty Detroit police officers are supported by Detroit Police Chief James Craig…The partnership has been bipartisan and regional. It’s been public and private, city and suburb. It’s required Republicans to act less Republican and Democrats to act less Democratic. That’s not because either side is suddenly non-partisan, but because the long history of confrontation and suspicion chronically under-delivers.” But he adds the critical point: “[A]s the city moves into an election year, as the memories of recessionary hardship dim, as the construction and investment boom continues. None of it is guaranteed, including collaboration forged by leaders under difficult circumstances…If there’s any town in America that can make its virtuous circle become a vicious cycle, Detroit is it. Remembering what’s worked, what hasn’t, and how inclusion can improve the chances for success remains critical…It’s a tricky balance that depends most on leadership and transparency so long as the macro-economic environment remains positive. If there are two themes connecting the reinvention of Detroit with its present, they are that a) experts expect the building and redevelopment boom to continue and b) neighborhood concerns are real and should not be dismissed.” In Detroit, it turned out going into chapter 9 municipal bankruptcy—a slide enabled by criminal behavior of its Mayor, and the profound failure to make it a city on a hill—a city which would draw families and businesses—was easy. That means getting out—and staying out—is the opposite in this fragile time of recovery, or, as Moddie Turay, executive vice president of real estate and financial services at the Detroit Economic Growth Corp., notes: “There’s a ton that’s happening here. We’re just not there yet…We have another five or so years to go. We are at a fragile time — a great time in the city, but still a fragile time.”

Disappearville? Breaking Up Is Hard to Do. Mayor Margaret J. Nelms and her Council Members in Centerville, North Carolina have voted to dissolve the town’s charter and become unincorporated in the wake of voters’ rejection, in January, of an effort to raise property taxes. The municipality (town), founded in 1882, in the rural northeastern corner of Franklin County had a population of 89 as of the 2010 census, a ten percent decline from the previous census: this is a municipality without a post office or a zip code—or, now, a future. It was incorporated during the same time period as the dissolution of the nearby town of Wood in 1961, roughly 80 years after first settlement. Unlike elected officials of other Franklin County municipalities (as well as the county itself) which have four-year terms, in Centerville, the Mayor and its three-member Town Council are elected every two years. The city’s downtown consists of two small old-fashioned country stores—Arnold’s and The Country Store, with one also the local gas station. The City has its own volunteer fire department: there is no police department, so Centerville—like the surrounding unincorporated area—is patrolled by the Franklin County sheriff.

Sen. Chad Barefoot (R), whose district includes Centerville, the sponsor of the state legislation [Senate Bill DRS45094-LM-35 (02/16)] to dissolve the municipality, noted: “There are a lot of towns like Centerville in North Carolina…What they’re doing is pretty courageous. They’re acting like adults. It’s something very hard to do, but it’s very responsible.” His proposed bill, the Repeal Centerville Charter, will allow the dissolution of the town, except that the governing board of the Town of Centerville would be continued in office for days thereafter for the sole purpose of liquidating the assets and liabilities of the Town and filing any financial reports which may be required by law, with any remaining net assets to be paid over to the Centerville Fire Department, which would be directed to use those funds for some public purpose. (In Centerville, the main municipal services provided to residents are: streetlights in the town center; Centerville also pays for an annual audit and holds municipal elections, although only a dozen citizens voted in the most recent municipal election, in 2015.) Centerville will continue to exist as a community, but any local-government services will be provided by the county: any remaining municipal funds left over after the town is unincorporated will be donated to the local volunteer fire department, according to the legislation. Dissolution is a painful choice: Frank Albano, the owner of an antique store in Centerville, rued the city did not consider other fiscal options, such as charging businesses like his an $100 annual operating fee, or asked $5 per float in the New Year’s Day parade. He notes: “The more local the government is, the better.”

The decision to dissolve is, however, not new: it was nearly a century ago that Farrington Carpenter, a Harvard-educated rancher in Colorado, noted that—at the time—there were 20 counties in the Mile High state with populations under 5,000. Municipalities—and their voters—rarely agree to give up their identities, leading him to query: “How can such small counties afford the cost of a complete county government?”  On the other end of the country, in Pennsylvania, home to more municipalities than any state in the union, running the gamut from metropolitan cities to first, second, and third class townships, it has long been a vexing governance conundrum how such a governing model is sustainable. Indeed, James Brooks, my former colleague from when I workd at the National League of Cities, where he serves as Director of City Solutions, reports that according to NLC’s 2015 report examining the economic vitality of cities, the smallest cities have generally been slower to recover—or, as one commentator describes it: “They can’t solve their problems themselves…Wealth has left these little cities to such a degree that they’re basically bankrupt.”

The Different Roads out of Municipal Bankruptcy

eBlog, 1/25/17

Good Morning! In this a.m.’s eBlog, we consider yesterday’s guilty plea from the former Mayor of Pennsylvania’s capitol, Harrisburg, for actions he had taken as Mayor which plunged the city to the brink of chapter 9 bankruptcy; then we consider Detroit Mayor Mike Duggan’s announcement that a majority of Detroiters will see a reduction in their property tax obligations—a sign of the signal fiscal turnaround. Then we head into the icy blast of Winter in Pennsylvania, where the former Mayor of Harrisburg has pleaded guilty to stealing city-purchased artifacts, before veering south to note Puerto Rico Gov. Ricardo Rosselló has signed into law an extension of Act 154’s tax on foreign corporations.  

Public Mistrust. Former Harrisburg, Pa., Mayor Stephen Reed pleaded guilty Monday to 20 counts of theft  for stealing artifacts purchased by the city in Dauphin County court Monday, with the outcome coming in the wake of negotiations with the state Attorney General’s office. The 20 counts reflects a dramatic reduction of criminal counts from the original more than 470, including many tied to fiscal decisions during his service as Mayor, a period which had propelled the city to the verge of chapter 9 municipal bankruptcy—and a leftover severe set of fiscal challenges still bedeviling the state capitol. The former mayor, in his comments to the press after the proceeding, described it as “gut-wrenchingly humiliating.” The Patriot-News of Harrisburg reported that Mr. Reed, who served as mayor from 1982 to 2009, admitted to taking 20 historic artifacts, but said he had no criminal intent. Judge Kevin Hess scheduled a sentencing hearing for Friday in the Dauphin County Court of Common Pleas in Harrisburg. The trial commenced in the wake of then Pennsylvania Attorney General Kathleen Kane in July of 2015 announcing the indictment of the former Mayor: prosecutors asserted he had diverted municipal bond proceeds, notably related to an incinerator retrofit project, to a special projects fund he allegedly used to purchase as many as 10,000 Wild West artifacts and other “curiosities” for himself—including a $6,500 vampire hunting kit—a series of disclosures which contributed to the city’s descent into receivership due to municipal bond financing overruns related to an incinerator retrofit project; the Harrisburg City Council filed for chapter 9 municipal bankruptcy in October of 2011, notwithstanding the objection of then-Mayor Linda Thompson; however, a federal judge two months later negated the filing, and a state-appointed receivership team pulled together a recovery plan approved by the Commonwealth Court of Pennsylvania in September of 2013. Yesterday, Christopher Papst, author of the book Capital Murder an Investigative Reporter’s Hunt for Answers in a Collapsing City, noted: “Stephen Reed’s guilty plea concerning his stealing of city artifacts is a good start for the people of Harrisburg who deserve answers and justice. But far more needs to be done and more people need to be held accountable for the city’s financial collapse…A strong message must be sent that any impropriety concerning municipal financial dealings will not be tolerated.”

Rebalancing Motor City’s Tax Wheel Alignments. Detroit Mayor Mike Duggan has announced that about 55% of residential property owners in the city will see a reduction in their property tax obligations later this year. His announcement came in the wake of the city’s completion of a three-year reappraisal project, as required under Detroit’s plan of debt adjustment approved by the U.S. Bankruptcy Court. According to Mayor Duggan, about 140,000 residents will realize an average reduction of $263 on their tax bills, while 112,000 will see an average increase of $80. The reappraisal process, unlike past years, assessed each property individually. Tax assessments were mailed Monday. The city, despite boasting one of the broadest tax bases of any city in the U.S., (its municipal income taxes constitute the city’s largest single source of revenues), nevertheless have been constrained by the state: only Chrysler and DTE Energy pay business taxes; moreover, state law bars cities from increasing revenues by adding a sales tax or raising residential property tax rates more than inflation. Moreover, in the years leading up to the city’s fiscal collapse into chapter 9 bankruptcy, homeowners had complained that their property taxes did not compare to the market value of their homes. Ergo, now Mayor Duggan is hopeful that the new assessment will improve property tax collections—or as he put it yesterday: “It turns out, when people feel they’re being assessed fairly, they pay their taxes….For years, we basically have taken entire neighborhoods or sections of the city and taken averages, which is the best that could be done with the data available.” But the new assessments are based upon house-by-house reassessments using aerial and street-level photography as well as field visits. In addition, the city digitized field cards for every single residential property, allowing employees to inspect the condition of homes based on the historical information and new ground and aerial photos, according to City Assessor Alvin Horhn—or, as Mr. Horn notes: “Where everything matched up, fine. Whenever there was a difference, we sent people out to look…For the most part, this was done at a desktop (computer) review.” Next up: a citywide reassessment of all commercial and industrial properties will be completed for the winter 2018 tax bills. According to city data, collections have increased steadily from about 68% in 2012-14 during the city’s municipal bankruptcy to 79% in 2015 and a projected 82% last year: from 2015 to 2016, the city reported that property tax collections increased approximately $8 million.

Act 54 Where Are You? Puerto Rico Gov. Ricardo Rosselló has signed into law an extension of Act 154’s tax on foreign corporations (mainly corporations manufacturing pharmaceuticals and other high-tech products), a key action to preserve revenues which provide a quarter of the U.S. Territory’s general fund revenues; the action came as Public Affairs Secretary Ramon Rosario Cortés submitted a measure to replace Puerto Rico’s Moratorium Law, an action which he said could mean Puerto Rico could dedicate some of the savings from which to provide “payment of interest or some part of the principal” in negotiations with the island’s creditors: “The obligations of the government of Puerto Rico will be fulfilled in an orderly process. The government is going to commit itself to the policy that what it is directed is to pay the obligations of the government of Puerto Rico. The first thing is essential services.” The discussion occurs at a pivotal point, as, since before the administration of newly elected Governor Ricardo Rosselló Nevares taking office, Senate President Thomas Rivera Schatz had announced that they were in tune to extend the expiration of the moratorium scheduled for the end of this month. If the government does not extend the litigation deadlock, it will face $1.3 billion in February, leaving it with no cash for operations, according to a liquidity report by Conway Mackenzie. Secretary Cortés, in response to a query yesterday with regard to interest payments, did note that would be possible “with the savings that are achieved, guaranteeing priority, which are essential services…The government of Puerto Rico will be making savings with this measure and the savings that will be made will be part of the renegotiation process, which could include the payment of interest or some part of principal, but in negotiation with creditors.” The revenues, as reported over the most recent half fiscal year, accounted for 25% of all General Fund revenues—more even than the $713 million in individual income taxes. The Act, adopted in 2010 to help address the dire fiscal imbalance, was set to impose a continually declining levy rate on foreign corporations until it would phase out this year, based on Treasury regulations promulgated six years ago which allow corporations to take tax credits against temporary excise taxes. Now a tricky shoal to navigate in the midst of the major transition in power in Washington, D.C. The issue involves whether the IRS will grant an extension of Act 154 past its current scheduled expiration at the end of this calendar year. According to Puerto Rico, 10 corporations and partnerships paid some 90 percent of all Act 154 taxes in FY2016. The law mainly affects corporations manufacturing pharmaceuticals and other high-tech products on the island.

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.