What Is the State Role in Municipal Solvency/Recovery?

 

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eBlog, 11/21/16

Good Morning! In this a.m.’s eBlog, we consider the state role in addressing municipal fiscal distress and bankruptcy: what are the different models—and how are they working? Then we consider one especially dysfunctional model: Ohio, where the City of East Cleveland could find its two Mayoral candidates in municipal jail before the voters go to the polls early next month. From thence, we strike east to consider this month’s elections in Massachusetts on charter schools—examining an issue that goes to the heart not only of state local relations and authority, but also to the potential impact on municipal assessed property values. What may be learned? Finally, we wish readers a Happy Thanksgiving!

What Is the State Role in Municipal Solvency/Recovery? Under our country’s system of dual federalism created by the founding fathers, while federal law authorizes municipalities to file for chapter 9 bankruptcy, a city, county, or school district may only do so if authorized by a state. Today, only 18 of the 50 states provide such authority. Ergo, one of the issues we have sought to consider through this eBlog has been the evolving State role in municipal distress in a field of seeming constant flux. This month, for instance, we experienced the uncertain governance situation in New Jersey in the wake of the state takeover of the City of Atlantic City—a state takeover in which the process and how it will play out could be further impacted by the potential selection by President-elect Trump of New Jersey Governor Chris Christie, who might be a potential Cabinet or other senior advisor to the President-elect.

Actual governance has shifted from local accountability to the state’s Division of Local Government Services—but with the state already having imposed a state emergency manager in the city, what the new state takeover means continues to be uncertain. In Ohio, which authorizes chapter 9 municipal bankruptcy, the City of East Cleveland’s request to do so appears to be on the desk of Rod Serling in the Twilight Zone: there has simply been no response of any kind. Similarly, in California, state policies have clearly contributed to some of the fiscal distress that led Stockton and San Bernardino into chapter 9 municipal bankruptcy, but the state played absolutely no role in helping either Stockton or San Bernardino to emerge. Michigan, a state which has been deeply enmeshed in municipal fiscal distress—albeit not necessarily in a constructive manner—has acted in different ways—going from its imposition of an emergency manager—a process with deadly consequences in Flint, but seemingly key to Detroit’s turnaround. Alabama, by refusing to allow Jefferson County to raise its own taxes, directly aided and abetted the County’s chapter 9 municipal bankruptcy. Rhode Island, on the day of Central Falls’ chapter 9 filing—the very day Providence, the state’s capitol city, was itself poised on the rim of filing, but opted not to—and the state, thanks to the exceptional ingenuity of its then Treasurer (now Governor), created an ingenious model of creating teams of city managers and retired state legislators to act in teams to offer assistance to cities in danger of insolvency—so that there was a team effort before—instead of after such a precipitous event.

Part of what has made this effort to assess what is happening in the arena of severe municipal fiscal challenges and bankruptcy so much more difficult is the surprise that, in the wake of recovery from the Great Recession, one would have assumed severe municipal fiscal distress and insolvency would have dissipated. It has not. What has changed? Why are States not reacting more uniformly? With only 18 states permitting municipal bankruptcy, what state models exist which offer a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion? What is a state’s role in recovery from a chapter 9 municipal bankruptcy? What is a state’s role in addressing increasing fiscal disparities?

Ungoverning in a Fiscal Twilight Zone. In East Cleveland, Ohio, the mall city which is seeking authority from the State of Ohio to file for chapter 9 bankruptcy—a plea to which it remains unclear whether there will ever be a response, and where there have been on and off discussions with adjacent Cleveland about a consolidation of the two municipalities; the city’s election day activities provide a sense of the increasing dysfunctional nature of the small city: it was, after all, on election day this month at Mayfair Elementary School where both candidate Devin Branch and current Mayor Gary Norton were working the polls trying to convince registered voters to go with their respective causes. Mayor Norton was pressing potential voters not to recall him at the city’s upcoming election on December 8th; Devin Branch was going door-to-door to obtain the 550 requisite signatures to ensure the recall would officially be on the ballot. Their respective efforts, however, came up against each other when they encountered each other going after the same person and their battle became an event where they pressed their respective clip boards in front of registered voters—leading to a confrontation so that Mayor Norton decided to order the Chief of Police and a squad of police to arrest Mr. Branch. Moreover, dissatisfied with the police response, Mayor Norton then ordered his personal lawyer, Willa Hemmons, to issue a warrant for the arrest of Mr. Branch. Thus, in an insolvent municipality, several squads of police and detectives were directed to make the arrest of Devin Branch last Thursday. Mr. Branch was arrested and placed in East Cleveland’s jail; last Friday, Judge William Dawson opened the door for his release after posting bond. This morning, Judge Dawson will hear from both men, albeit, what the voters and city’s taxpayers will hear seems unlikely to be enlightening for the city’s fiscal future.

Schooled in Fiscal Solvency? Massachusetts voters this month overwhelmingly rejected a major expansion of charter schools, rejecting Question 2 by nearly a 2-1 margin, in what was perceived as a significant setback for Governor Charlie Baker, who had aggressively campaigned for the referendum, saying it would provide a vital alternative for families trapped in failing urban schools. As proposed, the measure would have allowed for 12 new or expanded charters per year, adding significantly to the existing stock of 78 charters statewide. Had the measure been approved, it would have—as state-imposed charter schools in Detroit are, shifted thousands of dollars in state aid from public to charter schools—shifting as much as an estimated $451 million statewide this year. During the campaign, opponents such as Juan Cofield, president of the New England Area Council of the NAACP, warned that charters were creating a two-tiered system, draining money from the traditional schools that serve the bulk of black and Latino students, telling voters “a dual school system is inherently unequal.” Worcester Mayor Joseph Petty, an opponent, noted: “Here in Worcester we will spend $24.5 million dollars on charter schools in our city…that is money that could be used to hire more teachers, improve our facilities, and invest in our students,” in effect underscoring the reason municipal leaders in the Bay State opposed the measure: their apprehension with regard to the fiscal impact on cities, towns, and school districts when more children attend charter schools. Had the measure been adopted, district schools would have received less money: the money to educate a child would have followed the child: over time, expanding access to charter schools could cost local property taxpayers more, since district schools will need more funding, forcing local elected leaders to either raise property taxes more, or cut public services. Indeed, opponents of charter school expansion claimed, based on state data, that school districts would have lost some $450 million this year to charter school tuition, even after accounting for state reimbursements.

Unsurprisingly, ergo, municipal officials generally opposed expanding charter schools, with the mayors of Springfield, Boston, Chicopee, Holyoke, Northampton, Pittsfield, Westfield, and West Springfield all coming out publicly opposed. Geoff Beckwith, the Executive Director of the Massachusetts Municipal Association, said the current funding system is already difficult for cities and towns to deal with, noting that, for one, the formula transferring money from district to charter schools does not take into account the fact that many of a school’s costs are fixed and do not vary by child, noting that with regard to the fiscal impact on cities, towns and school districts: “You have to a have a classroom, you have to heat the building, you still have principals…It’s extremely hard for communities to actually cut costs…The only thing they can do is cut back on the overall quality of the programming they’re offering the vast majority of kids who stay behind in the regular public school system.” Ergo, he noted: “Until the financing system is fixed, the ballot question providing for the expansion of charter schools would exacerbate and deepen the financial trouble that these local school systems are dealing with…And the communities that are most impacted by charter school expansion are in most cases the most financially challenged communities.” (Unsurprisingly, the Massachusetts Municipal Association board voted unanimously to oppose the ballot question.) Indeed, Moody’s reported the rejection to be a credit positive for the Commonwealth’s urban local governments: “It will allow those cities and towns to maintain current financial operations without having to adjust to increased financial pressure from charter school funding.” According to Moody’s, since the last charter school expansion in 2010, cities such as Boston, Fall River, Lawrence, and Springfield have experienced significant growth in charter school assessments, averaging 83% due to increasing charter school enrollment. To which, Moody’s notes: “So far, the growing cost of charter schools on municipalities has not been a direct credit challenge; rather the effect is more indirect because Massachusetts school districts are integrated within cities and towns with relatively healthy credit profiles.” The agency went on to write: “Education in the commonwealth is a primary budget item within a municipality’s overall budget, which allows city budgets to absorb some of the education financial stress with other municipal sources….This integration is a key distinction from school districts in other states that operate separately from the communities they serve.”

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.

Past & Future Municipal Bankruptcies: the Curious Role of States

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eBlog, 5/06/16

In this morning’s eBlog, we consider the likely municipal bankruptcy—the first in more than a year—and mayhap the first ever in Ohio—by East Cleveland. Then we turn to the fate of Atlantic City—and the most curious and damning role of the state. A suit raises serious allegations with regard to what might be deemed worse than ‘contributory negligence.’ Then we go to school in Lansing, where the state House and Senate are going to school over how to fiscally and physically fix the city’s broken public school system. We note the wonderful honor, yesterday, to be able to, in Chicago, meet with Judge Steven Rhodes’ substitute, U.S. Bankruptcy Judge Frank Bailey—who presided over Central Falls’ or Chocolateville’s chapter 9 municipal bankruptcy, as well as former Providence Mayor Angel Taveras—with whom are genius class of senior No. Virginia local government employees who wrote a GMU fiscal recovery guidebook, Financial Crisis Toolkit (created with digital tabs), had met in Providence—at the very night the decision not to file for municipal bankruptcy was made! Finally, we visit Lansing, where the future of Detroit’s kids and the city’s future with regard to its public schools is at stake. The complex business of public school finance draws at the intersections of state and local finance—and has immense operating and capital implications—not to mention political.

Teetering on the Edge of Municipal Bankruptcy. The City of East Cleveland has asked the State of Ohio—a step which, under Ohio’s municipal bankruptcy law (§133.36), requires approval of its municipal tax commission—to approve a petition for municipal bankruptcy. East Cleveland, which is a charter city of about 18,000 granted its authority under the home rule provisions of the Ohio constitution, has seen its population fall dramatically over the years, from 39,600 in 1970 to the most recent census figure of 17,843 for 2010—even as its minority population has grown to 94.5 percent. The city’s median household income of $20,660 is less than half the statewide $48,849—indeed, based on median taxable income, the East Cleveland school district, which includes a small portion of Cleveland Heights, has the highest poverty rate in Ohio: 42.1 percent versus 15.9 percent statewide. Worse, the rate for the city’s children in poverty is higher at 60.2 percent, nearly thrice the statewide rate of 22.7 percent. The median home value (county appraisals) is $36,900—and the city currently has a vacancy rate of 37.1 percent—more than thrice the statewide 11 percent. In short, East Cleveland is a municipality not just with a past history of fiscal challenges, but now a point of perhaps no return.

Formerly under a Commission and City Manager form of government, city residents and taxpayers, frustrated with that form of government in the wake of having two of its former commissioners charged with theft in office, and after a revolving door of city managers resulted in little stability and a reduction in services; Citizens for Sound Government, a group of East Cleveland residents, led a petition drive to elect a strong mayor and to create a five-member city council. Attorney Darryl E. Pittman, thus, became the first mayor to lead the city since 1908. Yet, during his second term, the Ohio State Auditor in the autumn of 1988 declared the municipality to be in a state of fiscal emergency in the wake of finding that the city’s water and sewer fund were found to have deficits in excess of $2 million. Subsequently, under the next Mayoral administration, the city increased its borrowing in an effort to recover from its fiscal emergency—a state in which it remained over the next eight years—culminating in the conviction on charges of racketeering and corruption of former Mayor Emmanuel Onunwor. Ergo, in his letter to Ohio Tax Commissioner Joseph Testa, current Mayor Gary Norton wrote, the city is in a trying effort to keep payroll going and to maintain services. Council President Thomas Wheeler said even if approved, filing for chapter 9 municipal bankruptcy would be a “Band-Aid” to keep the city going, not a solution. The Mayor, in his epistle, wrote that, based on the city’s fiscal projections, “the City will be unable to sustain basic fire, EMS, or rubbish collection services,” adding that the municipality’s Financial Recovery Plan, approved by the City Council, would have the effect of “decimating our safety forces.”

In Ohio, where no entity had previously filed for municipal bankruptcy protection, such a petition requires the approval of a municipality’s tax commission. While the Ohio Tax Commissioner’s office said it was preparing a response, it has yet to offer any public comment. For his part, Mayor Norton said that the municipal bankruptcy filing would be a temporary fix for the cost side of the city’s economic distress, but the real problem was with income—there simply, he warned—was insufficient revenue coming in to support the city—and that raising tax rates or imposing new fees would not provide an immediate solution. The request from the city can hardly come as a surprise to the state: State Auditor David Yost’s office last year had issued a statement that municipal bankruptcy or merging with the City of Cleveland were probably the most viable options for the city.

State Duplicity & Increasing Fear of Fiscal Contagion in New Jersey. Weeks of mounting political tension over how to save Atlantic City from financial collapse came to a head Thursday in a dramatic day at the Statehouse that ended with opposing sides once again pointing fingers at each other. State Assembly Speaker Vincent Prieto abruptly canceled an anticipated vote on his proposed and sponsored plan to provide a fiscal life-preserver to Atlantic City in the wake of realizing he lacked sufficient votes to get it passed. That opened the door to Gov. Chris Christie and New Jersey State Senate President Stephen Sweeney to declare it was time for Speaker Prieto to allow the Assembly to vote on their rival proposal: for the state to take over the city for five years—a plan the Senate has already approved—but which the Speaker opposes—with Sen. Sweeney noting: “I’ve had enough of this now…The Speaker proved he cannot pass his own bill,” warning that, otherwise, Atlantic City could face municipal bankruptcy in as little as 10 days, when they predict the local government will run out of money. Ramping up the ugly state war, Gov. Christie charged that Speaker Prieto’s opposition to the Senate plan had been “a waste of time and a waste of money and much too much drama,” with the former Presidential contender adding unironically: “Today we had a vanity exercise by politicians preening for higher office, rather than a solution for folks who really need it in Atlantic City.” In response, Speaker Prieto claimed he had a sufficient number in the House; however, four of his majority had been unable to “make it” to Trenton, adding that when he had asked his members of the Assembly for a show of hands whether they would support the Christie/Sweeney bill to impose a state takeover of Atlantic City: “Not one hand went up.” Ergo Speaker Prieto promised there would be another vote as early as next Wednesday on a new compromise bill—one to which, the Speaker said, he hoped the Senate President would be a party.

The Governor’s stance, however, is undercut by the apparent actions of the state—especially the New Jersey Department of Community Affairs. In a suit filed in Superior Court—with the Department of Community Affairs, the suit notes that “In 2013, the Local Finance Board again assessed the financial condition of {Atlantic} City as well as the good faith efforts of the City Administration in working with the State and determined that no additional regulatory conditions were necessary,” adding that the state had been “integrally involved in the financial decisions of the City and imbedded in its Fiscal operations…,” but that “[B]eginning in 2015, the Director of DGLS began a series of initiatives, ostensibly to aid the City of Atlantic City, but which ultimately would prove to be disastrous for the fiscal stability of the city.” The suit notes that the Department—for the 2015 city budget, “bypassed the governing body of the City of Atlantic City, and presented the 2015 Atlantic City budget directly to the Local Finance Board for approval and adoption…Through this unprecedented action, the DLGS deprived the City Council, as the elected representatives of the people of Atlantic City, the opportunity to have any input into the expenditures for Atlantic City for the upcoming budget year,” a budget in which DGLS, according to the claim, “inserted the sum of $33.5 million dollars in anticipated revenue,” the amount sufficient to achieve a balanced municipal budget—creating, understandably, the firm impression of a state commitment for that amount.

Indeed. DLGS Director Cunningham last September—in seemingly direct contradiction of claims by Gov. Christie—noted: “I feel the need to make sure that both the record and my colleagues on the Board know that the cooperative relationship that the Division has had with the City of Atlantic City in recent months, at least certainly during my tenure in this position. It’s been extraordinary.” Notwithstanding, however, the Twilight Zone state $33.5 million, has not only not been provided—but not even a bridge loan as requested by the City for that amount due to its reliance on that amount—or, as the suit notes: “By depriving the City of the requested information, the DGLS deliberately deprived the City of the tools necessary to fully comply with its own request. DGLS then used that deprivation against the City by asserting that the City failed to produce a plan.”

The suit has not been litigated, so the issue involves a the state’s judicial branch or third part of state government to weigh the demerits or merits with regard to the state’s contributory culpability, the outcome. By any measure, this goes to the issue of trust. A finding against the state, after all, would add to the increasing apprehension of fiscal contagion: some fiscal experts are warning that other New Jersey municipalities may experience municipal credit downgrades should Atlantic City become the first municipality since Fort Lee 78 years ago filed for chapter 9 municipal bankruptcy—even as Gov. Christie claimed that some Republicans believe that municipal bankruptcy may be the better option: “Bankruptcy is preferable to kicking the can down the road.” Credit rating agency S&P Wednesday noted that “a default or debt restructuring appears to be a virtual certainty even under the most optimistic circumstances.”

Detroit’s Kids’ Future. With the school year coming to a close in Detroit and the city’s public school system (DPS) beset by teacher sickouts and fiscal and physical insolvency—retired U.S. Bankruptcy Judge Steven Rhodes, at the behest of Gov. Rick Snyder, is once again stepping into the breach by accepting appointment to serve as DPS’ Emergency Manager—hopefully to end a year-long debate over the future of the recovering city’s public schools—schools whose fiscal future now appears transfixed between Republican lawmakers over the proliferation of charter schools and the amount of fiscal resources critical to help the state’s largest public school district avoid municipal bankruptcy. The Michigan House before dawn yesterday adopted a $500 million rescue plan—a plan which includes controversial provisions curtailing union rights and which would impose tougher anti-strike measures, measures without doubt triggered by the teacher-staged “sick-outs,” but a plan directly the obverse of Gov. Rick Snyder’s—a plan which proposes to pay off $515 million in DPS debt and provide a new, debt-free Detroit school district with another $200 million to anticipate continued declining enrollment.

Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) yesterday said the House plan was passed “under duress,” suggesting the House version would not receive a passing grade in the legislature, but noting: “We don’t do our best work at 4 in the morning.” The Senate-passed version establishes a Detroit Education Commission to regulate the opening of traditional public and charter schools in the city. Now, as the legislature debates — something community leaders have requested — Sen. Goeff Hansen, who represents Muskegon, Newaygo, and Oceana Counties, now notes: “We need Detroit to buy-in. This has to be Detroit’s solution.” Sen. Hansen has taken the lead in the Senate to overhaul Detroit’s broken school system. However, given the chasm between the House and Senate positions, if the House or the Senate were to fail to act on the other body’s proposed DPS package, legislative leaders would likely send negotiations into conference. Nevertheless, the ever-patient Judge Rhodes deemed the House plan “an important step in the right direction for Detroit and Detroit’s children;” however, he suggested the Senate’s plan would be better for the 45,786-student school system’s long-term viability, telling the Detroit News: “In order for the new district to be set up for success, it will need the $200 million that was originally advanced in the Michigan Senate’s bill package.” Similarly, Detroit Mayor Mike Duggan told The Detroit News that the House plan would “end up being a waste of $500 million” without restraints on the number of charter schools in the city, adding that the House version would continue the state’s track record of “abysmal results” for Detroit’s children following seven straight years of emergency management: “Instead of sitting down and working on a transition plan this time, last night was basically ‘throw up your arms and send it back…’ No reforms in place, not enough money. It’s disappointing.” House Republicans did not include the Senate-proposed commission in their plan in the wake of heavy charter school lobbying. It appears the battle in the city between public versus charter school advocates is reverberating in Lansing to the detriment of the city’s children. A 2014 City Council resolution prohibited the city’s land bank from selling any of DPS’ 77 vacant former school buildings to charter operators that directly compete with traditional public schools.

Thus, yesterday, Democrats and Detroit legislators united against the House plan, adopted to help DPS avert insolvency—but impose new limitations on collective bargaining rights and prolong state oversight. The House’s proposed funding, which would be drawn from Michigan tobacco settlement revenues, would help the district pay down about $467 million in debt over seven years and provide another $33 million to cover start-up costs and avoid potential cash flow problems in coming months. House Appropriations Chair Al Pscholka (R-Stevensville) noted that the full Legislature recently approved some nearly $49 million in stop-gap funding for DPS, adding the new plan would free up another $50 million in annual funding by helping the district avoid debt payments, with the Chairman noting: “There’s plenty of money there, and I think there’s enough to not only make them debt-free, but to help them going forward.” The state actions are critical, after all, not only to the educational rehabilitation of DPS, but also its physical collapse: as part of the $200 million in start-up costs, DPS would spend $75 million making immediate improvements to schools after city inspectors found mold and other dangers lurking in occupied buildings.

The House vote came with provisions which seemed in response to the week’s teacher so-called “sickouts,” by including tougher anti-strike policies designed to crackdown on the massive teacher sickouts that closed most DPS schools Monday and Tuesday—and deprived our conference session in Chicago yesterday of the formidable, if electronically musical, presence of retired U.S. Bankruptcy Judge and now DPS Emergency Manager Steven Rhodes. House Speaker Kevin Cotter noted: “There was a desire for accountability, and to say strikes are illegal in Michigan for teachers, but there are no teeth to it…So what we did in this package is beef it up so it can be enforced.” Indeed, House Republicans have been tracking Detroit teacher sickouts since last month, when 18 Detroit public schools were closed while educators protested in Lansing as the Governor unveiled his plan to bail out DPS; moreover, all 97 DPS schools have been closed at least two days over the past year due to the “sickouts,” amounting to 1.4 million hours of lost instruction time, according to data from House Republicans. Nevertheless, the ever optimistic Gov. Rick Snyder described the House plan as a sign of “positive progress,” adding, however, “there is still more [home]work to do.”

As the two versions await reconciliation, there is a discrepancy of over $200 million in funding and restoration of authority to DPS from the Detroit Financial Review Commission created in the wake of Detroit’s municipal bankruptcy. The House would change teacher pay to merit—as opposed to seniority, and would make so-called sickouts more difficult to call. The Senate version would provide for school board elections in November—and have the Detroit Financial Review Commission oversee schools and review contracts. It proposes creation of a Detroit Education Commission to regulate the opening of new traditional public or charter schools in the city, requiring that only high-performing charters could “replicate” without approval of a Mayor-appointed commission. And, it would create an A-F letter grading system to grade all traditional and charter schools in Detroit: consistently failing schools could face intervention or closure.