Investing in Fiscal & Human Futures

June 11, 2018

Good Morning! In this morning’s eBlog, we consider the issue of keeping Puerto Rico’s schools open in the face of quasi municipal bankruptcy; then we veer north to assess post-state taken over Atlantic City: What Are the City’s Fiscal Odds for Its Future?  

The Governance Challenge for Schools and Demographic Changes. Puerto Rico Superior Court Judge Santiago Cordero Osorio has ordered the suspension of the closure of three of the U.S. territory’s schools in Morovis, pending an explanation from Secretary of Education Julia Keleher of the reasoning behind her orders. His ruling came as part of a lawsuit brought by the Municipality of Morovis challenging the closures of Alverio Pimentel, Manuel Alonso Díaz, and the Second David Colón Vega schools—and in the wake of the Judge’s earlier decisions ordering the closure of six other schools in the Arecibo region—closures also being challenged by the Teachers’ Association. In his order, Judge Osorio noted that all these claims will be evaluated in a court hearing scheduled for this morning—one to which he has invited the Secretary of Education or a representative to attend, noting: “This Court appreciates and recapitulates that the State must come prepared to justify in accordance with its regulations the closure, not only of the schools subject to this interdict, but of all the schools of the Commonwealth of Puerto Rico that the Department of Education has under its jurisdiction, and that it pretends according to the regulation to close.”

For his part, Mayor Carmen Maldonado of Morovis explained the suit was filed in the wake of a non-response to her request for a meeting with Secretary Keleher, stating, in a press release: “Today we are taking an important step in the defense of public education for Moroveño children. To all parents, principals, teachers and school staff, I invite you to attend that hearing on Monday at the Arecibo Court, so that together we can continue to fight to keep schools open. As I assured them in the many meetings we had, although the power is in the hands of the central government, the reason is on our side and we are going to defend that reason. The fiscal and governance challenge-as we had experienced in Detroit’s chapter 9 municipal bankruptcy, is a state versus local authority issue. Indeed, as the Department’s legal division stated: “The opening and closing of the schools is under the authority of the Secretary of Education and this is established by Law 85 of 2018 (Law on Educational Reform).”

The Rebirth of an Iconic American City?  Victor Fiorillo, writing in the Philadelphia Magazine, asked in his article, “The Re-Re-Re-Birth of Atlantic City,” what if everyone was wrong about the fiscal implications of the closure of the city’s famed casinos. Writing that Atlantic City had first drawn him in about 15 years ago with the opening of the Borgata Casino—at a time when “most other casinos in Atlantic City were in various stages of decay, and here was this brand-new Vegas-style resort with casino restaurants that were actually good and the best shows in town.” But he also noted that, back then, it was really a family focus: “My wife and I spend as much of the summer as possible on the A.C. beach with our 10-year-old and 12-year-old, opting for the relative solitude of the town’s southern end, far from any casinos or bars.” But in revisiting the municipality today, he noted he is not one of the only “believers in Atlantic City,” noting there are “some surprising signs of life these days, not to mention some serious investment—from small ventures, like Longacre’s projects, to big bets like Stockton University’s new beachfront campus and this month’s opening of the $550 million Hard Rock Hotel & Casino in the old Trump Taj Mahal.

Betting on the City’s Future. Mr. Fiorillo then turned to the recent U.S. Supreme Court decision allowing sports gambling, noting: “There’s more money pouring into A.C. right now than in all of Philadelphia,” according to development mogul Bart Blatstein, but, as with gambling, quoting Temple Professor Bryant Simon, author of 2004’s Boardwalk of Dreams: Atlantic City and the Fate of Urban America: “Atlantic City has risen and fallen innumerable times: “This is the story that has been told for a hundred years.” He added: “The irony, of course, is that this new resurgence is happening just a few short years after nearly half the city’s casinos went under, thousands of jobs disappeared, and Atlantic City itself seemed to be left for dead. Then again, maybe there’s no irony here at all. Maybe this more organic, up-from-the-ground rebirth of Atlantic City is exactly the kind of action that could mean sustained success for the city by the sea.”

Leaving on a Jet Plane. Mr. Fiorillo examined the city’s road to its state takeover from a non-fiscal perspective, writing: “It was right around this time that Atlantic City began to fade. Dissertations and books have been written about the many factors that led to the resort’s demise in the late 1960s and early 1970s, but a big one was the sudden ease of jet travel. You could get on a plane after breakfast and be on a beach in Miami for lunch. Atlantic City? Pfft. The Shore town began to disintegrate. By the mid-’70s, the city found itself at a pivotal crossroads. It could do nothing, ride out the downward trend, and see what happened. Or it could come up with some novel and wholly artificial way to inject new life into itself. It opted for the latter, betting that gambling would be Atlantic City’s salvation. Until that point, Nevada was the only place in the United States where you could open up a full-fledged casino. But in 1976, New Jersey citizens voted to make slots and table games legit in Atlantic City. The first casino, Resorts—which just turned 40 and is still standing — opened less than two years later.”

Noting that, for a time, business was booming, he credited Atlantic City’s casinos for bringing hundreds of millions of tourists to the Boardwalk during Atlantic City’s gambling heyday” “Some years, this city of 40,000 residents topped 34 million tourists. But outside the casino walls, the city struggled. The casino owners—including, for a time, Donald Trump—got fat, politicians got their kickbacks, and the impoverished residents of Atlantic City remained just that: And then everything went wrong. The new Atlantic City created in the late 1970s was premised almost entirely on maintaining a casino duopoly with Nevada; once casinos started popping up all over—including in Pennsylvania in 2006—Atlantic City imploded.”

Noting, as we have traced, the city’s fiscal nadir came to a head in January of 2014, when the Atlantic Club, which had opened as the Golden Nugget in 1980, collapsed, followed by Showboat, followed by the Revel, followed shortly thereafter by the Trump Plaza, noting: “Finally, in October 2016, one month before its namesake was elected to the Oval Office, the lights went out at Trump Taj Mahal. In just two and a half years, five casinos vanished, their cavernous buildings shuttered. Atlantic City had bottomed out economically in the most spectacular fashion possible.”

Tracing a Fiscal Turnaround. Writing that when assessed property values drop low enough, neighborhoods become more and affordable—and, ergo, more attractive to developers who could “pick up buildings for pennies on a dollar,” he noted that “Atlantic City suddenly became a risk worth taking”—adding: “Investing in Atlantic City now makes a lot more sense than it did five years ago, but it’s hardly a no-brainer. The city, with its 37% poverty rate) is overwhelmingly poor. Taxes are overwhelmingly high. And walking around on Atlantic or Pacific Avenue, the city’s two main north-south boulevards, which run parallel to and within blocks of the Boardwalk—can be nerve-racking after hours. In daylight, panhandlers accost and prostitutes solicit. Politically, things are hardly ideal: Then-governor Chris Christie instituted a state takeover in 2016.

John Longacre, who has acquired a reputation for building a business by spotting potential where others see potential disaster, and he works primarily in South Philadelphia, where he specializes in recovery projects that save buildings, convert seedy bars into trendy restaurants and turn vacant eyesores into neighborhood hubs, told Mr. Fiorillo: “Every bank in the region is terrified of Atlantic City.” Indeed, Mr. Longacre added: “If you look at the policy surrounding everything that exists in Atlantic City, it’s the perfect storm to keep investors out: From the state handling the zoning to the tax base to rent control, everything that happens from a policy level makes it seem like New Jersey is trying to make Atlantic City fail.” Nevertheless, he seems convinced the fabled city will not fail. Or, as Mr. Fiorillo described it, there are a new breed interested in the fabled city who likely will play an essential role in the city’s future: “It’s not about Aunt Edna and Uncle Fred and their casino bus trips anymore. It’s about younger people who aren’t into Atlantic City for the gambling. It’s about people who don’t just feel comfortable in but desire urban environments, with all their flaws and character. It’s about people who respect and require diversity. It’s about people like me and my wife, who, to be honest, cringe when we drive into a place like Avalon.”

Describing this fiscal and physical revival, he writes about the relationship of small projects complemented by large ones: “The Hard Rock Hotel is finally going to open on the Boardwalk later this month, where the Taj Mahal was until October 2016. Pottstown native Todd Moyer, senior vice president of marketing for this new outpost of the rock-and-roll-themed company, got his start in the casino business in 1990, when he worked as a tuxedoed greeter at, coincidentally, the Taj. I was working for Hard Rock out West, when I got the chance to come home: I jumped at it. Sometimes I would be at a bar or restaurant and hear people talking about Atlantic City being dead, and I’d jump in. I’m a defender and a giant supporter of A.C. We’re building hotels all around the world, but really, all the focus lately has been on Atlantic City.”

As for Mr. Longacre, his view is that he would “love for every casino to go out of business and see Atlantic City re-create itself without them, as an urban beach town.” Nevertheless, he believes there is one massive Atlantic City development which will be a game-changer: Stockton, the nearly 50-year-old public university, which has its main campus in Galloway Township, about 20 minutes from the Boardwalk: it is set to debut a brand-new beachfront Atlantic City campus this September, when one thousand students will use the campus, and many of them plan to live in town. Thus, he notes: “Stockton is huge. It’s the first real institutional investment in years that’s not a casino.”

Rolling the Fiscal Dice? As significant as these fiscal changes appear to be, they almost seem to pale against the city’s real world challenges: Atlantic City has a poverty level three times higher than the statewide rate: more than three times the number below the poverty level—and a disability rate among non-poor residents of just under 25%. In its rental housing, the percentage of residents below the federal poverty level is over 90%. A consequent governing challenge for the post-taken over city and the Garden State remains. Mr. Fiorillo notes that whether the gambles being made by Mr. Blatstein, Mr. Longacre, and others are successful remains to be seen—as does the question with regard to whether all the investment will put much of a dent in Atlantic City’s poverty rate or help the town’s current residents. He adds: “And it’s not going to be this summer or next summer when we find out who, if anyone, wins. Nevertheless, he wrote: “When I consider Point Breeze circa 2008 and that same area today, I have hope for this complicated Shore town. There will always be casinos here, for better or worse, and there will always be crime and poverty and grime. This is, after all, a city. But, 10 years from now, when my own kids are (I hope) in very good colleges, it’s not too hard to imagine us spending a summer weekend at some boutique hotel on New York Avenue. We’ll stop into the Boardwalk La Colombe for a draft latte, served up by a very hip-looking third-year Stockton student on break. For lunch, HipCityVeg down in the inlet. Happy hour will be at some John Longacre-owned brewpub overlooking the Atlantic.”

States & Municipal Accountality

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eBlog, 2/06/17

Good Morning! In this a.m.’s eBlog, we consider the new municipal accountability system proposed by Connecticut Gov. Daniel Malloy to create a new governance mechanism which could trigger early state intervention, then we head west to consider whether Detroit voters will re-elect Mayor Mike Duggan to a second term.  

Municipal Accountability, or “Preventing a Train Wreck.” Connecticut Governor Daniel P. Malloy, noting that “Our towns and cities are the foundation of a strong and prosperous state,” said: “Healthy, vibrant communities—and thriving urban centers in particular—are essential for our success in this global economy…In order to have vibrant downtowns, retain and grow jobs, and attract new businesses, we need to make sure all of our municipalities are on solid fiscal ground or on the path to fiscal health.” Ergo, the Governor has proposed a new municipal accountability system intended and designed to provide early intervention for the Nutmeg State’s cities and towns before they slip into severe fiscal trouble—a signal contrast to, for instance, New Jersey—where, as we have noted, such intervention is after the fact; Alabama, where the state not just refused to act, but actually facilitated Jefferson County’s chapter 9 municipal bankruptcy by barring the city from raising its own revenues; California, where the state has absented itself from playing any role in responding to municipal bankruptcy or fiscal distress—and Michigan, where the state acts early to intervene through the appointment of Emergency Managers—albeit such intervention has, as we have observed in the instances of the City of Flint and the Detroit Public Schools contributed to not just worsening the fiscal crises, but also endangered human lives—especially of young children and their futures.

Gov. Malloy’s proposal would create:

  • a four-tier ranking for municipalities in fiscal or budgetary distress,
  • an enhanced state evaluation of local fiscal issues, and
  • a limit on annual property tax increases for cities and towns deemed at greatest risk of fiscal insolvency.

Currently, Connecticut’s chief budget and policy planning agency, the Office of Policy and Management, routinely reviews annual audits for all municipalities. Under Gov. Malloy’s new proposal, which will be outlined in greater detail the day after tomorrow in Gov. Malloy’s new state biennial budget plan, OPM and a new state review board will have added responsibilities to review local bond ratings, budget fund balances, mill rates, and state aid levels—all with a goal of creating a new, four-tiered municipal fiscal early warning system focused on the identification of municipalities confronting fiscal issues well before their problems approach the level of insolvency. Under his proposal, Connecticut cities and towns with the most severe challenges and risks would be assigned to a higher tier—a tier in which there would be increased state focus and, if the system works, greater state-local collaboration. As proposed, a municipality might be assigned to one of the first three tiers if it has a poor fund balance or credit rating, or if it relies on state aid for more than 30 percent of its revenue needs. In such tiers, the state’s cities and towns would face additional reporting requirements. Moreover, cities and towns in Tiers 2 and 3 would be barred from increasing local property tax rates by more than 3 percent per year. For cities and towns in the lowest fiscal category, the fourth tier, the state would also impose a property tax cap. For these municipalities, the state review board could:

  • Intervene to refinance and otherwise restructure local debt;
  • Serve as an arbitration board in labor matters;
  • Approve local budgets;
  • And appoint a manager to oversee municipal government operations.

The system proposes some flexibility: for instance, a municipality would be assigned to a lowest tier, Tier 4, only if it so requested from the state, or if two-thirds of the new state review board deemed such a ranking necessary, according to Governor Malloy—who estimated that about 20 to 25 of the state’s 188 municipalities might be assigned any tier ranking under his proposal, who described those municipalities which might act to seek to work more closely with the state as ones confronted by “pockets of poverty.”

In response, Connecticut Conference of Municipalities Executive Director Joe DeLong said the Connecticut municipal association appreciated the Governor’s efforts to foster dialogue and had “no issue” with his proposals, but said they should be accompanied by other changes, noting: “The overreliance on property taxes, especially in urban areas where most of the property is tax exempt continues to be a recipe for disaster…Oversight without the necessary structural changes, only insures that we will recognize an impending train wreck more quickly. It does not prevent the wreck.”

This Is His City. Detroit Mayor Mike Duggan this weekend vowed to “fight the irrational closing” of a number of public schools in the city, as he initiated his re-election campaign—and, mayhap, cast a swipe at President Trump’s Education Secretary cabinet choice. Making clear that he would not be running what he termed a “victory lap campaign,” he vowed he would seek to change the recovering city’s focus towards “creating a city where people want to raise their families,” vowing to work hand-in-hand with the Detroit Public Schools Community District School Board in the wake of the Michigan School Reform Office’s recent decision to close low-performing public schools in Detroit and another elsewhere in the state—a state action which could shutter as many as 24 of 119 city schools at the end of this academic year, and another 25 next year if they remain among the state’s lowest performers for another year, based on state rankings released this month which mark consistently failing schools for closure. Mayor Duggan added that he had called Gov. Rick Snyder at the end of last week to tell him the closure is “wrong” and that the school reform office efforts are “immoral, reckless…you have to step in.” Mayor Duggan noted that “[R]eform means first you work with the teachers in the school to raise that performance at that school; second you don’t close the school until you’ve created a quality alternative…Neither one of those has happened here.” The Mayor met yesterday with the school board leadership, and has noted that Gov. Snyder had originally taken the position that closure of the city’s schools would create a legal issue, adding: “You do not have a legal right to have no schools when the children have no reasonable alternative nearby…I’m going to be working with the Detroit public schools…We want to start by sitting down together with the Governor and coming up with a solution. That’s going to be the first order of business.”

Detroit Public Schools Community District School Interim Superintendent Alycia Meriweather thanked Mayor Duggan over the weekend, saying: “As stated multiple times, we do not agree with the methodology, or the approach the (state school reform office) is using to determine school closures, and we are cognizant of the fact that all of the data collected is entirely from the years the district was under emergency management…Closing schools creates a hardship for students in numerous areas including transportation, safety, and the provision of wrap around services…As a new district, we are virtually debt free, with a locally elected board; we deserve the right to build on this foundation and work with our parents, educators, administrators, and the entire community to improve outcomes for all of our children.”

Ms. Ivy Bailey, the President of the Detroit Federation of Teachers, which represents about 3,000 city educators, noted: “The bottom line is this is his city…We don’t want the schools to close.” Ms. Bailey said the newly elected school board had just taken office and needs to be given an opportunity “to turn things around.” A representative for Gov. Snyder could not be immediately reached Saturday, nor could Detroit School Board President Iris Taylor.

Last week, Mayor Duggan picked up petitions to run for re-election, joining 14 others, according to records provided by the city’s Department of Elections. None of the prospective candidates have turned in signatures yet for certification. The filing deadline is April 25. The primary is August 8. The Mayor, when asked who his biggest competition is in the race, said only: “[T]his is Detroit, there’s always an opponent.” “There will be a campaign,” he said. “This is Detroit.”

Mayor Duggan comes at his re-election campaign to be the city’s first post chapter 9 leader after being schooled himself in hard knocks: in his first campaign, he had been knocked off the ballot when it was determined he had failed to meet the city’s one year residency requirement; ergo, he had run as a write-in candidate, and, clearly, run effectively: he received 45 percent of the vote in the primary, and had then earned 55 percent of the vote to become the Motor City’s first post-municipal bankruptcy Mayor. Thus, in his re-election effort, he has been able to point to milestones from his first term, including:

  • the installation of 65,000 new LED street lights,
  • improved police and EMS response times,
  • new city buses as well as added and expanded routes,
  • the launch of the Detroit Promise, a program to provide two years of free college to graduates of any city high school,
  • several major automotive manufacturing centers and suppliers,
  • and a new Little Caesars Arena which will be the future home of the Detroit Red Wings and Detroit Pistons,
  • The relocation by Microsoft (announced Friday) to downtown Detroit in the One Campus Martius building early next year,
  • The results, to date, of the city’s massive blight demolition program—a program which has led to the razing of nearly 11,000 houses, primarily with federal funding, since 2014 (albeit a program which has been the subject of a federal criminal investigation and other state, federal and local reviews after concerns were raised in the fall of 2015 over soaring costs and bidding practices.) Officials with the city and Detroit Land Bank Authority, which oversees the program, have defended the effort, and, last week, Mayor Duggan said an ongoing state review of the program’s billing practices turned up $7.3 million in what the state contends are improper costs. Ergo, Detroit will pay back $1.3 million of that total, but the remaining $6 million—mainly tied to a controversial set-price pilot in 2014—will go to arbitration.