Fiscal & Physical Challenges to the Nation’s State & Local Leaders

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August 17, 2017

Good Morning! In this a.m.’s Blog, we consider the fiscal and physical challenges to municipal and state leaders in the wake of the physical violence this week in Charlottesville, Virginia—and the wavering response from President Donald Trump. Then we return to the City of Flint, where federal court decisions appear to have opened the way for help to assist in access to safe drinking water for the city’s beleaguered residents. Finally, we ask to what degree there might be promise in PROMESA, as the PROMESA Board appears to be seeking independent fiscal analysis in an effort to better address options for fiscal recovery.

Visit the project blog: The Municipal Sustainability Project 

Fiscal & Physical Municipal Mayhem. Municipal leaders across the nation are suddenly on notice that the federal government cannot be counted upon to help respond to threats of violence and mayhem by alt-right groups in the wake the events last Saturday in Charlottesville, Virginia, as alt-right leaders and white nationalist groups have vowed to stage more rallies in coming days: a group claiming it is advocating free speech has planned a rally for Saturday on the historic Boston Common, with a group advocating racial justice planning its own gathering in opposition. Boston officials have responded by setting strict conditions, including no sticks, weapons, or backpacks—or, as Mayor Marty Walsh stated: “Make no mistake: We do not welcome any hate groups to Boston, and we reject their message.” A similar rally scheduled for the end of this month in San Francisco has prompted House Minority Leader Nancy Pelosi (D-Ca.)) and several California lawmakers to urge the National Park Service to rescind the permit to gather on federal parkland there. Indeed, the events this week in Charlottesville—and the President’s response, has confronted municipal leaders with hard questions with regard to how to deal with their Confederate monuments, an issue that has suddenly become much more urgent.

In the wake of the violent public clashes, mayors, governors, and other civic leaders are taking steps that even a week ago might not have seemed necessary. Now, however, uncertain of any federal support, city and county leaders will be confronted by costly decisions both with regard to granting permits, but also with regard to what resources to make available to avert injuries to citizens and destruction of local businesses—fearing that the white nationalist movement could attract a larger following, a following perhaps abetted by the remarks yesterday of President Trump. Darrel Stephens, the Executive Director of the Major Cities Chiefs Association, noted that many of the people who came to Charlottesville wore helmets and carried shields: “These guys, the shields that they showed up with. . . you don’t bring that stuff to a demonstration to just express a view…You bring that there prepared for violence. Why else would you have them?”

From time immemorial in our country, demonstrations in cities have been part of the fabric of the nation, so this challenge is not new: there were certain members of Parliament in the mid-1775’s who very much wanted to ban “hate groups” from Colonials in places such as Chesapeake, Williamsburg, Petersburg, Yorktown, that Virginia municipality where a combined French and American army under Alexandria’s George Washington pinned down and besieged a British force under Lord Cornwallis, forcing his surrender on Oct. 19, 1781. The marches and rallies in Virginia, it seemed, were vital to securing independence from Britain. One may well imagine Lord Cornwallis’ response.

We have, in this country, a long and honored tradition of marches and rallies—the writer even spent unmitigated hours negotiating with authorities in the U.S. Embassy in Vienna, the City of Vienna, and Austria to obtain a permit to demonstrate against the killings at Kent State. It is hard to imagine a more important tradition in our young nation than the right to demonstrate: the challenge of governance, however, is how to ensure such demonstrations do not risk life and limb. That is the hard task upon which Virginia Governor Terry McAuliffe is now proposing to embark upon, appropriately recognizing the Commonwealth—and its cities and counties—really need to rethink how to protect citizens and their rights—much as former President Kennedy and Johnson had to do in a different era. That responsibility will also require determining how to define “hate groups”?  Was the Confederate Army a hate group? Was George Washington’s army a hate group?

In Like Flint? The United States 6th Circuit Court of Appeals’ reversal on July 28th of a federal court’s decision in two lawsuits filed by Flint, Michigan residents over the contamination of their drinking water, has emboldened lawyers and their plaintiffs, who said residents of the predominately African-American city still are being billed for dirty water they cannot use, clearing the way for tens of thousands of Flint residents to continue their lawsuit against the State of Michigan and local officials—or, as the prevailing attorney noted: “The court’s decision means that the trial court’s dismissal of the case was legally incorrect and the appeals court has sent it back…A lot of our case deals with the fact that residents in Flint have been charged three-times the national rate for water, because the city is trying to balance their budget and these charges and fees come at the exact time that they couldn’t use the water…Not only did they come during the period in which they were getting contaminated water and having their children poisoned, but the water bills kept coming and they were told not to drink the water by an EPA mandate, and they were also told that if they didn’t pay their bill, they’d have a lien placed on their home and face foreclosure. That’s not America.”

In its ruling, the federal appeals court overturned a lower federal court ruling which had dismissed a major class-action lawsuit filed in 2015 on behalf of tens of thousands of Flint residents against Gov. Rick Snyder, the city of Flint, and Flint municipal officials who were involved in deciding to switch to the Flint River as its water source. The decision allows the plaintiffs to seek relief from the State of Michigan in another case in the form of compensation for education, medical monitoring and evaluation services for ongoing harm from Flint’s contaminated water crisis, as well opening the way for cases seeking financial damages against individual state employees, the city of Flint, city employees, and state-appointed emergency managers to proceed. The decision came as Michigan Attorney General Bill Schuette and his legal team have pursued criminal and misdemeanor charges against or accepted plea deals with 15 persons, including former Flint employees and former and current state officials, as well as two former Flint emergency managers appointed by Governor Snyder. (The class-action lawsuits involve Flint residents who experienced personal injury and property damage from the Flint River decision, after they were exposed to toxic lead that leached from the city’s pipes into the water supply.) The trial court ruled that the federal Safe Drinking Water Act stopped the plaintiffs from seeking damages, but the appeals panel ruling allows U.S. District Judge Judith Levy to continue weighing the issue.

The appeals court decision came just prior to dismissal, this week, in federal District Court, of a whistleblower lawsuit against Flint Mayor Karen Weaver filed by a former city official who alleged she was fired for raising alarms over possible misuse of water crisis contributions. Former City Administrator Natasha Henderson sued Mayor Weaver and the City of Flint in May of last year, claiming she was wrongfully terminated two days after sending then-city attorney Anthony Chubb an email asking him to look into an “allegation of unethical conduct” by Mayor Weaver; however, U.S. District Court Judge Sean Cox permanently dismissed the three-count complaint, ruling Ms. Henderson failed to prove Mayor Weaver was aware of her complaint prior to firing her, writing: “The Court concludes that Henderson has not produced sufficient circumstantial evidence from which a reasonable jury could infer that Weaver knew of Ms. Henderson’s complaint to Mr. Chubb before she fired Henderson.”

Ms. Henderson had emailed Mr. Chubb one day after a purported conversation with Mayor Weaver’s administrative assistant, Maxine Murray. Ms. Murray “fearfully” told Ms. Henderson that the Mayor had asked her and a volunteer to direct water crisis contributions into the Mayor’s political fund, Karen about Flint, according to the suit. Mr. Chubb was serving as interim chief legal officer during Ms. Henderson’s suit, and said he was seeking the permanent appointment. Ms. Henderson speculated he gave the Mayor a “preview of information about her accused malfeasance” in order to “curry favor,” a speculation with which Mr. Chubb took exception. Judge Cox, in his opinion, noted: “Henderson seeks to prove Weaver’s knowledge by circumstantial evidence,” as he also dismissed a First Amendment claim by Ms. Henderson, ruling that her speech was not constitutionally protected, because she was operating in an official government capacity, not as a private citizen. At the same time, he was entitled to “absolute immunity” against defamation claims by Ms. Henderson, who alleged the Mayor had made false statements about her after her firing, writing: “Weaver is entitled to immunity, because her alleged statements were made in the scope of her executive authority.”

Is There Promise in PROMESA? The PROMESA Board has issued an RFP in an effort to secure an independent research team to conduct an investigation into Puerto Rico’s debt and its connection with the U.S. territory’s fiscal crisis, defining the scope to include:

  • a review of the factors contributing to the fiscal crisis in Puerto Rico, including changes in the economy, expansion of spending commitments and benefit programs, changes in the federal financing it receives and its dependence on debt to finance a structural budget deficit,
  • a review of Puerto Rico’s debt, the general use of the proceeds of borrowing, the relationship between debt and the structural budget deficit of Puerto Rico, the extent of its debt instruments and how Puerto Rico’s debt practices compare with the debt practices of large municipal states and jurisdictions, and
  • a review of debt issuance, disclosure and sale practices of Puerto Rico, including its interpretation of Puerto Rico’s constitutional debt limit.

It was also stated that proposers will be evaluated and selected based on their professional qualifications, the competitiveness of their economic proposal, the integrity and quality of their response to the RFP, their relevant experience in conducting research, their knowledge and experience in federal securities law, knowledge and experience in the municipal bond market, government budget and fiscal management, and the ability to commence work immediately—albeit failure to meet all the above areas will not necessarily disqualify a proposal.

The independent investigative team will report to the Special Investigation Committee of the Supervisory Board, composed of members Ana Matosantos, David Skeel, and Arthur González.

The Art of State Fiscal Intervention

08/08/17

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Good Morning! In this a.m.’s blog, we consider the political and fiscal challenges to recovery for a municipality with disproportionate levels of crime and low income—but aided by state intervention.

Ending the Fiscal Siege of Petersburg. More than a century ago, from June 9, 1864, to March 25, 1865, during the American Civil War, the Richmond–Petersburg Campaign was torn by a series of battles around Petersburg, Virginia. In the past few years, the battle waged has been fiscal rather than physical for the independent city of about 32,420, where, last year, Virginia Finance Secretary Ric Brown, in providing a fiscal update, based on a state audit of the city’s books dating to 2012, had reported the municipality was facing a $12 million budget gap—and nearly $19 million in unpaid bills. But now, Sec. Brown has just announced that the small municipality’s bond rating outlook has been upgraded from “negative” to “stable,” confirming the value of the Commonwealth’s fiscal intervention. S&P’s announcement, coming nearly one year of weathering one of the lowest possible municipal bond ratings, led Mayor Samuel Parham to note: “We are proud of everyone’s efforts who made this positive reassessment possible.” But it is one small, fiscal step: At last week’s session, the City Council agreed to develop a deficit-reduction plan at its next meeting, scheduled for a week from Thursday: more fiscal work portends in the wake of last month’s action by the Council to approve a salary cut for the city’s 600 full-time employees: layoffs of staff and other austerity measures are now a real possibility.

That fiscal endeavor will proceed under a newly appointed City Manager, Aretha R. Ferrell-Benavides, who was appointed last month to be responsible for the day-to-day operations of the city and report directly to the City Council. She does not come unprepared for the task, having served as the interim city manager, where she was put in the awkward role of informing the City Council and a packed hall of residents about the requisite critical cuts to city services and reduced funding for the city’s schools—already among the lowest-performing in the Commonwealth—as well as cuts to fire and police services in a city which has an unusually high rate of crime: some 87% higher than in comparison to the Virginia mean and are 35% higher than the national mean. With regard to violent offenses, Petersburg, has a rate that is 313% higher than the Virginia average; its property crime is 63% higher than the statewide mean. Nearly 30% of the city’s residents live in poverty, more double the statewide rate, and the city has a disproportionate percentage of its population older than 65.  As the population has declined from its peak in 1980, it has also aged — more than 15 percent of residents are 65 or older, vs. 13 percent statewide., and 22% higher than the country’s average—all steps necessary she warned, because, otherwise, Petersburg had about a month before it would confront the unthinkable: total collapse—it was a fiscal state which Virginia Finance Secretary Ric Brown noted to be unlike anything he had ever observed in his 46 years minding state ledgers in various roles.

In describing its upgrade to a “stable” outlook, Standard and Poor’s states that a “stable” outlook means the rating is unlikely to change. This is a slight improvement from a “negative” outlook. Standard and Poor’s Primary Credit Analyst, Timothy Barrett, said that the city had “taken several key steps toward financial recovery, including repaying a portion of past due obligations in addition to creating a viable plan to strengthening budgetary flexibility and liquidity, supported by some recently adopted financial policies.”

Petersburg Finance Director Blake Rane notes that the improved fiscal outlook will enhance the city’s fiscal “flexibility: It’s clear [the city] has changed trajectory in the past year, to a point where there is no risk beyond what the “BB” already says,” adding: “It’s really hard to move Standard and Poor’s [rating], and get the kind of movement we did.” In its report, Standard and Poor’s noted Petersburg has “taken several key steps toward financial recovery, including repaying a portion of past due obligations in addition to creating a viable plan to strengthening budgetary flexibility and liquidity, supported by some recently adopted financial policies.”

Notwithstanding the good gnus, Petersburg’s leaders recognize this is no time to let up: Despite the good news,  interim Finance Director Nelsie Birch and the other city officials recognize much fiscal effort remains: “It should help the investment community have confidence that the city is moving in the right direction, though we are still non-investment grade credit.” Until the city restores its fund balance, which would require at least $7.7 million dollars, the city’s credit rating will have to await a boost to investment grade—some two notches higher than its current grade—meaning it must pay higher interest rates for capital investment and borrowing than most Virginia municipalities.

The Difficult Interplay of State & Local Physical & Fiscal Challenges, especially those that can threaten lives, health, and public safety.

07/26/17

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Good Morning! In today’s iBlog, we consider the fiscal and physical challenges confronting the City of Flint, Michigan as it seeks to settle on a permanent drinking water source.

Out Like Flint. Michigan Attorney General Bill Schuette has provided an update on his criminal investigation of the Flint drinking water crisis—a crisis which evolved from the state’s appointment of an emergency manager in place of the city’s elected leaders, and which has, since, led to steadily higher in the ranks of the state government, with the update coming as the Michigan Department of Environmental Quality has sued the City of Flint over claims the City Council has been foot-dragging in approving a switch to the Great Lakes Water Authority (GLWA) to provide its long-term drinking water. Mr. Schuette was joined by Genesee County Prosecutor David Leyton, his special counsel Todd Flood, and his chief criminal investigator Andrew Arena—with, to date, some baker’s dozen current or former Michigan or City of Flint officials charged, including two gubernatorially-appointed emergency managers who were reported to the State Treasurer. The suit alleges “the City Council’s failure to act will cause an imminent and substantial endangerment to public health in Flint.”

Michigan Department of Environmental Quality officials have acknowledged a mistake in failing to require corrosion-control chemicals to be added to the water—a mistake costly to health care, the city’s fisc, and trust in government, in the wake of lead leaching from pipes, joints, and fixtures into Flint homes and drinking water—leaving a situation today where residents are still advised not to drink tap water without a filter: five current or former state employees charged previously are from the Michigan Department of Environmental Quality and three from the Department of Health and Human Services, in the wake of outbreaks of Legionnaires’ disease after the state-ordered water switch—a switch which health investigators have since tied to 12 deaths.

Even though state and federal health officials have yet to definitively link the water switch to the disease, Michigan Attorney General Scheutte and his investigators have come close to doing so in public statements and documents related to the criminal charges. Last September, he warned Michigan Health and Human Services Director Nick Lyon he was a focus of the investigation, although, since, there has been no additional notification. But there are difficult fiscal, as well as physical and intergovernmental issues. Richard Baird, a senior advisor to Gov. Rick Snyder, at a meeting with the Flint Water Interagency Coordinating Committee, last Friday noted: “Given that the City of Flint is paying for two water sources and does not have a favorable long-term contract with the Great Lakes Water Authority (GLWA), the lack of action is costing the city an extra $600,000 each month: The city has projected that it will deplete its water and sewer fund reserves by the 4th quarter of 2018, which will necessitate a significant rate increase for residents and business if the matter is not resolved.”

Such an increase would be hard on the city’s citizens: per capita income for Flint was $23,593 in 2015—nearly 20% below the statewide average. Thus, it is most unsurprising that Mayor Karen Weaver, last April, recommended, with the support of Genesee County, GLWA, and state officials that the city extend its contract with GLWA for 30-years: such a contract would result in about $9 million in savings, because it would lock in a more favorable rate with GLWA and address the $7 million in debt service payments Flint is currently obligated to pay—with Mayor Weaver noting the decision ensured water quality for the city that is still recovering from a water contamination crisis that stemmed from the decision of its previous state-appointed emergency managers to shift water sources and participate in the KWA project. Under her proposed plan, Flint would recoup roughly $7 million in annual debt service by transferring its KWA water rights to the GLWA. (The city was preparing to shift to KWA supplied, untreated water in 2019, with plans to make much-needed upgrades to its treatment plant to comply with federal EPA drinking water standards; however, last April, the Mayor dropped the plan to make the switch to the bond-financed pipeline and recommended the city continue to purchase water from GLWA—claiming the GLWA supplied and treated water is more affordable and would save the city the fiscal and physical risk of still another supply shift: the switch is projected to result in a $2.4 million savings, because GLWA would impose a better rate than is currently available under the current short-term contract with the city.)

The City Council, last Wednesday, voted to postpone the vote on the water plan for another 30 days, after, last month, voting to extend Flint’s contract with GLWA to September in an effort to provide more time to examine and weigh the costs and benefits of the longer term water contract—a delay which Mayor Weaver described as triggering the need to petition the federal court to determine the contours of the legal authority for the city and state to properly execute the requisite agreements to secure a long-term water source “on behalf of the people of Flint.” The state complaint, filed in the U.S. District Court, seeks a declaration that the Flint City Council’s failure to act is a violation of the federal Safe Drinking Water Act and an order that Flint must enter into the long-term agreement with GLWA.

Flint City Councilman Eric Mays believes the federal court should give the City Council 30 days in which to call state officials to testify about the deal and allow the City Council to tweak it, stating he wants to amend the agreement to ensure Flint does not lose its investment in the Karegnondi Water Authority—a new pipeline to Lake Huron which was instrumental in Flint switching away from Detroit water while under the control of a state-appointed emergency manager. However, Michigan Department of Environmental Quality Director Heidi Grether had given the City Council a deadline to approve the agreement last month, writing: “The City is currently paying $14.1 million per year to obtain water from the GLWA through a 72-inch line that was previously transferred to Genesee County…Due to its decision to transfer the line, Flint will lose use of the 72-inch line on Oct. 1, 2017, absent approval of the Mayor’s recommendation: No other alternate pipeline currently exists to supply GLWA water to Flint.”

At the end of last week, ergo, Mr. Baird told Flint and Genesee County officials that the City Council’s indecision on a long-term water source was not only costing more than a half million dollars each month, but also risking “significant” water rate increases next year if something were not done soon, adding that the city’s stalling on selecting a long-term water source was imposing an extra $600,000 each month, because the city is currently purchasing water from two water sources—the Great Lakes Water Authority, from which it currently gets its treated water, and the Karegnondi Water Authority, from which it contractually would take water by 2019 to 2020. His remarks were given as part of an update on a federal lawsuit the Michigan Department of Environmental Quality filed late last month against the Flint City Council—a suit in which the state alleges the elected council members have endangered the public health by failing to approve a long-term drinking water source. He added that if the Flint City Council continues to delay its vote on the 30-year contract offer, the city’s water and sewer fund reserves are expected to be tapped out by the end of 2018—an outcome which, he warned, would “necessitate a significant rate increase for residents and businesses if this is not resolved.”

Mayor Weaver has recommended the Council approve the 30-year contract with the Detroit area Great Lakes authority, in part to ensure the cleanest water at the most inexpensive price. (The city already pays some of the nation’s highest water rates: approximately $53.84 per month on the water portion of residents’ monthly bill, according to a report from Raftelis Financial Consultants of Missouri). A 2016 report from Food and Water Watch, which surveyed the nation’s 500 biggest water systems, found that Flint residents paid almost double the national average for water and the highest rates in the country despite the city’s water being undrinkable without a filter.

Rising from Municipal Bankruptcies’ Ashes

07/24/17

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Good Morning! You might describe this a.m.’s e or iBlog as The Turnaround Story, as we consider the remarkable fiscal recovery in Atlantic City and observe some of the reflections from Detroit’s riot of half a century ago—a riot which presaged its nation’s largest chapter 9 bankruptcy, before we assess the ongoing fiscal turmoil in the U.S. territory look at Puerto Rico.

New Jersey & You. Governor Chris Christie on Friday announced his administration is delivering an 11.4% decrease in the overall Atlantic City property tax rate for 2017—a tax cut which will provide an annual savings of $621 for the City’s average homeowner, but which, mayhap more importantly, appears to affirm that the city’s fiscal fortunes have gone from the red to the black, after, earlier this month, the City Council accepted its $206 million budget with a proposed 5% reduction in the municipal purpose tax rate, bringing it to about $1.80 per $100 of assessed valuation. Atlantic City’s new budget, after all, marks the first to be accepted since the state took over the city’s finances last November; indeed, as Mayor Don Guardian noted, the fiscal swing was regional: the county and school tax rates also dropped—producing a reduction of more than 11%—and an FY2018 budget $35 million lower than last year—and $56 million below the FY2016 budget: “We had considerably reduced our budget this year and over the last couple of years…I’m just glad that we’re finally able to bring taxes down.” Mayor Guardian added the city would still like to give taxpayers even greater reductions; nevertheless, the tax and budget actions reflect the restoration of the city’s budget authority in the wake of last year’s state takeover: the budget is the first accepted since the state took over the city’s finances in November after the appointment last year of a state fiscal overseer, Jeff Chiesa—whom the Governor thanked, noting:

“Property taxes can be lowered in New Jersey, when localities have the will and leaders step in to make difficult decisions, as the Department of Community Affairs and Senator Jeff Chiesa have done…Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents. Annual savings of more than $600 for the average household is substantial money that families can use in their everyday lives. This 11.4% decrease is further proof that what we are doing is working.”

Contributing to the property tax rate decrease is a $35-million reduction in the City’s FY2017 budget, which, at $206.3 million, is about 25% lower than its FY2015 budget, reflecting reduced salaries, benefits, and work schedules of Atlantic City’s firefighters and police officers, as well as the outsourcing of municipal services, such as trash pickup and vehicle towing to private vendors. On the revenue side, the new fiscal budget also reflects a jackpot in the wake of the significant Borgata settlement agreement on property tax appeals—all reflected in the city’s most recent credit upgrade and by Hard Rock’s and Stockton University’s decisions to make capital investments in Atlantic City, as well as developers’ plans to transform other properties, such as the Showboat, into attractions intended to attract a wider variety of age groups to the City for activities beyond gambling—or, as the state-appointed fiscal overseer, Mr. Chiesa noted: “The City is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the City’s residents and businesses.

The Red & the Black. Unsurprisingly, there seems to be little agreement with regard to which level of government merits fiscal congratulations. Atlantic City Mayor Guardian Friday noted: “We had considerably reduced our budget this year and over the last couple of years…“I’m just glad that we’re finally able to bring taxes down.” Unsurprisingly, lame duck Gov. Christie credited the New Jersey Department of Community Affairs and Mr. Chiesa, stating: “Our hard work to stop city officials’ irresponsible spending habits is bearing tangible fruit for Atlantic City residents.” However, Tim Cunningham, the state director of local government services, earlier this month told the Mayor and Council the city and its budget were moving in the “right direction,” adding hopes for the city’s fiscal future, citing Hard Rock and Stockton University’s investment in the city; while Mr. Chiesa, in a statement, added: “The city is on the road to living within its means…We’re not done yet, but we’ve made tremendous progress that working families can appreciate. We’ll continue to work hard to make even more gains for the city’s residents and businesses.”

Do You Recall or Remember at All? Detroit Mayor Mike Duggan, the white mayor of the largest African-American city in America, last month spoke at a business conference in Michigan about the racially divisive public policies of the first half of 20th century which helped contribute to Detroit’s long, painful decline in the second half of the last century—a decline which ended in five torrid nights and days of riots which contributed to the burning and looting of some 2,509 businesses—and to the exodus of nearly 1.2 million citizens. The Mayor, campaigning for re-election, noted: “If we fail again, I don’t know if the city can come back.” His remarks appropriately come at the outset of this summer’s 50th anniversary of the summer the City Detroit burned.

Boston University economics Professor Robert Margo, a Detroit native who has studied the economic effects of the 1960’s U.S. riots, noting how a way of life evaporated in 120 hours for the most black residents in the riot’s epicenter, said: “It wasn’t just that people lived in that neighborhood; they shopped and conducted business in that neighborhood. Overnight all your institutions were gone,” noting that calculating the economic devastation from that week in 1967 was more than a numbers exercise: there was an unquantifiable human cost. That economic devastation, he noted, exacerbated civic and problems already well underway: job losses, white flight, middle-income black flight, and the decay and virtual wholesale abandonment of neighborhoods, where, subsequently, once-vibrant neighborhoods were bulldozed, so that, even today, if we were to tour along main artery of the riot, Rosa Parks Boulevard (which was 12th Street at the time of the riots), you would see overgrown vacant lots, lone empty commercial and light industrial buildings, boarded-up old homes—that is, sites which impose extra security costs and fire hazards for the city’s budget, but continue to undercut municipal revenues. Yet, you would also be able to find evidence of the city’s turnaround: townhouses, apartments, and the Virginia Park Community Plaza strip mall built from a grassroots community effort. But the once teeming avenue of stores, pharmacies, bars, lounges, gas stations, pawn shops, laundromats, and myriad of other businesses today have long since disappeared.

In the wake of the terrible violence, former President Lyndon Johnson created the Kerner Commission, formally titled the National Advisory Commission on Civil Disorders, to analyze the causes and effects of the nationwide wave of 1967 riots. That 426-page report concluded that Detroit’s “city assessor’s office placed the loss—excluding building stock, private furnishings, and the buildings of churches and charitable institutions—at approximately $22 million. Insurance payouts, according to the State Insurance Bureau, will come to about $32 million, representing an estimated 65 to 75 percent of the total loss,” while concluding the nation was “moving toward two societies, one black, one white—separate and unequal.” Absent federal action, the Commission warned, the country faced a “system of ’apartheid’” in its major cities: two Americas: delivering an indictment of a “white society” for isolating and neglecting African-Americans and urging federal legislation to promote racial integration and to enrich slums—primarily through the creation of jobs, job training programs, and decent housing. In April of 1968, one month after the release of the Kerner Commission report, rioting broke out in more than 100 cities across the country in the wake of the assassination of civil rights leader Martin Luther King, Jr.

In excerpts from the Kerner Report summary, the Commission analyzed patterns in the riots and offered explanations for the disturbances. Reports determined that, in Detroit, adjusted for inflation, there were losses in the city in excess of $315 million—with those numbers not even reflecting untabulated losses from businesses which either under-insured or had no insurance at all—and simply not covering at all other economic losses, such as missed wages, lost sales and future business, and personal taxes lost by the city because the stores had simply disappeared. Academic analysis determined that riot areas in Detroit showed a loss of 237,000 residents between 1960 and 1980, while the rest of the entire city lost 252,000 people in that same time span. Data shows that 64 percent of Detroit’s black population in 1967 lived in the riot tracts. U. of Michigan Professor June Thomas, of the Alfred Taubman College of Architecture and Urban Planning, wrote: “The loss of the commercial strips in several areas preceded the loss of housing in the nearby residential areas. That means that some of the residential areas were still intact but negatively affected by nearby loss of commercial strips.” The riots devastated assessed property values—creating signal incentives to leave the city for its suburbs—if one could afford to.

On the small business side, the loss of families and households, contributed to the exodus—an exodus from a city of 140 square miles that left it like a post WWII Berlin—but with lasting fiscal impacts, or, as Professor Bill Volz of the WSU Mike Ilitch School of Business notes: the price to reconstitute a business was too high for many, and others simply chose to follow the population migration elsewhere: “Most didn’t get rebuilt. They were gone, those mom-and-pop stores…Those small business, they were a critical part of the glue that made a neighborhood. Those small businesses anchored people there. Not rebuilding those small businesses, it just hurt the neighborhood feel that it critical in a city that is 140 square miles. This is a city of neighborhoods.” Or, maybe, he might have said: “was.” Professor Thomas adds that the Motor City’s rules and the realities of post-war suburbanization also made it nearly impossible to replace neighborhood businesses: “It’s important to point out that, as set in place by zoning and confirmed by the (city’s) 1951 master plan, Detroit’s main corridors had a lot of strip commercial space that was not easily converted or economically viable given the wave of suburban malls that had already been built and continued to draw shoppers and commerce…This, of course, all came on top of loss of many businesses, especially black-owned, because of urban renewal and I-75 construction.”

Left en Atras? (Left Behind?As of last week, two-thirds of Puerto Rico’s muncipios, or municipalities, had reported system breakdowns, according to Ramón Luis Cruz Burgos, the deputy spokesman of the delegation of the Popular Democratic Party (PPD) in the Puerto Rico House Of Representatives: he added that in Puerto Rico, a great blackout occurs every day due to the susceptibility of the electric power system, noting, for instance, that last month, for six consecutive days, nearly 70 percent of Puerto Rico’s municipalities had problems with electricity service, or, as he stated: “In Puerto Rico we have a big blackout every day. We have investigated the complaints that have been filed at the Autoridad de Energía Eléctrica (AEE) for blackouts in different sectors, and we conclude that daily, two-thirds of the island are left without light. This means that sectors of some 51 municipalities are left in the dark and face problems with the daily electricity service.”

It seems an odd juxtaposition/comparison with the events that triggered the nation’s largest ever chapter 9 municipal bankruptcy in Detroit—even as it reminds us that in Puerto Rico, not only is the Commonwealth ineligible for chapter 9 municipal bankruptcy, but also its municipalities. Mr. Cruz Burgos noted that reliability in the electric power system is one of the most important issues in the economic development of a country, expressing exasperation and apprehension that interruptions in service have become the order of the day: “Over the last two months, we have seen how more than half of the island’s villages are left dark for hours and even for several days, because the utility takes too long to repair breakdowns,” warning this problem will be further aggravated during the month of August, when energy consumption in schools and public facilities increases: “In the last two months, there are not many schools operating and the use of university facilities is also reduced for the summer vacation period. In addition, many employees go on vacation so operations in public facilities reduce their operation and, therefore, energy consumption.”

Jose Aponte Hernandez, Chair of the International and House Relations Committee, blamed the interruptions on the previous administration of Gov. Luis Fortuno, claiming: it had “abandoned the aggressive program of maintenance of the electrical structure implemented by former Gov. Luis Fortuna, claiming: “In the past four years the administration of the PPD did not lift a finger to rehabilitate the ESA structure. On the contrary, they went out of their way to destroy it in order to justify millionaire-consulting contracts. That is why today we are confronting these blackouts.”

The struggle for basic public services—just as there was a generation ago in Detroit, reflect the fiscal and governing challenge for Puerto Rico and its 88 municipalities at a time when non-Puerto Rican municipal bondholders have launched litigation in the U.S. Court of Federal Claims to demand payment of $3.1 billion in principal and interest in Puerto Rico Employment Retirement System bonds (In Altair Global Credit Opportunities Fund (A), LLC et al. v. The United States of America)—the first suit against the U.S. government proper, in contrast to prior litigation already filed against the Puerto Rico Oversight Board, with the suit relying on just compensation claims and that PROMESA is a federal entity. Here, as the Wizard of chapter 9 municipal bankruptcy, Jim Spiotto, notes, the key is whether the PROMESA board was acting on behalf of the federal government or on behalf of Puerto Rico—adding that he believes it was acting for Puerto Rico and, ergo, should not be considered part of the federal government, and that the U.S. Court of Federal Claims may find that the federal government’s actions were illegal. Nevertheless, the issue remains with regard to whether the bonds should be paid from the pledged collateral—in this case being Puerto Rico employer contributions. (The Altair complaint alleges that the PROMESA Board is a federal entity which has encouraged, directed, and even forced Puerto Rico to default on its ERS bonds—a board created by Congress which has directed the stream of employer contributions away from the bondholders and into the General Fund, according to these bondholders’ allegations.

Foundering Federalism?

07/12/17

Good Morning! In this a.m.’s eBlog, we consider the seemingly increasing likelihood of chapter 9 bankruptcy for Connecticut’s capital city, Hartford, before veering south to consider the ongoing fiscal storms in the U.S. Territory of Puerto Rico.

Moody Blues. In the latest blow from the capital markets to Connecticut’s capital city, Standard & Poor’s Global Ratings late Tuesday lowered Hartford’s general obligation ratings to junk bond status—with the action coming less than a week after we had reported the city had hired a firm to help it explore options for chapter 9 or other steps involving severe fiscal distress. Moody’s Investors Service had already downgraded Hartford’s bonds to a speculative-grade (Ba2), and it has placed the city on review for yet another downgrade.  S&P’s action appeared to reflect an increased likelihood Connecticut’s capital could default on its debt or seek to renegotiate its obligations to its bondholders, with S&P credit analyst Victor Medeiros noting: “The downgrade to BB reflects our opinion of very weak diminished liquidity, including uncertain access to external liquidity and very weak management conditions as multiple city officials have publicly indicated they are actively considering [municipal] bankruptcy.” The ratings actions occurred as the city continues to seek more state aid and concessions from the city’s unions—even as the state remains enmired in its own efforts to adopt its budget. Mayor Luke Bronin, in an interview yesterday, confirmed the possibility of bond restructuring negotiations. This is all occurring at a key time, with the Governor and legislators still negotiating the state’s budget—on which negotiations for the fiscal year which began at the beginning of this month, remain unresolved. In a statement yesterday, Mayor Bronin noted:  “I have said for months that we cannot and will not take any option off the table, because our goal is to get Hartford on the path to sustainability and strength.” He added that any long-term fiscal solution would “will require every stakeholder—from the State of Connecticut to our unions to our bondholders—to play a significant role,” adding: “Today’s downgrade should send a clear message to our legislature, to labor, and to our bondholders that this is the time to come together to support a true, far-sighted restructuring.”

A key fiscal dilemma for the city is that approximately 51 percent of the property in the city is tax-exempt. While the state provides a payment in lieu of local property taxes (PILOT) for property owned and used by the State of Connecticut (such payment is equal to a percentage of the amount of taxes that would be paid if the property were not exempt from taxation, including 100% for facilities used as a correctional facility, 100% for the Mashantucket Pequot Tribal land taken into trust by federal government on or after June 8, 1999, 100% for any town in which more than 50% of all property in the town is state-owned real property, 65% for the Connecticut Valley Hospital facility, and 45% for all other property; such state payments are made only for real property.  

Unretiring Debt. U.S. Federal Judge Laura Taylor Swain gave the government of Puerto Rico and the Employees Retirement Systems (ERS) bondholders until yesterday to settle their dispute over these creditors’ petition for adequate protection—warning that if a deal was not reached, she would issue her own ruling on the matter—a ruling which could mean setting aside at least $18 million every month in a separate account, albeit Judge Swain noted she was not ready at this time to say whether that would entail adequate protection. Her statement came even as Puerto Rico Governor Ricard Rossello Nevares yesterday stated that, contrary to complaints made by the Chapter of Retirees and Pensioners of the Federation of Teachers, the House Joint Resolution does not represent a “threat,” but rather comes to ensure pension payments to public workers who once served the U.S. Territory, adding, however, that the retirement system as it was known no longer exists, stating it “is over,” in the absence of resources that can ensure long-term pension payments: What we have done is that we have changed from a system where it was a fund to a pay system where what implies is that now the government under the General Fund assumes responsibility for the payment of the pension…That is, the retired do not have to fear, quite the opposite. The measure that we are going to do saves and guarantees the System. If we had not implemented this in the fiscal plan…the retirement system would run out of money in the next few months.” Describing it as a “positive measure for pensioners,” because, absent the action, it was “guaranteed to run out of money,” the Governor spoke in the wake of a demonstration, in front of La Fortaleza, where spokesmen of the Chapter of Retirees and Pensioners of the Federation of Teachers denounced the measure—a measure approved by both legislative bodies and sent to the Executive last month as a substitute retirement system for teachers.

Unsurprisingly, the Puerto Rico government and representatives of labor unions and retirees opposed the ERS bondholders’ request to lift the stay under PROMESA’s Title III. In response to Judge Swain’s query to the bondholders: “If I were to enter a sequestration in the manner you stipulated…What would that do for you?” Jones Day attorney Bruce Bennett responded; “Not enough,” as the ERS bondholders argued they needed adequate protection, because Puerto Rico has not made the requisite employer contributions to the ERS, which guarantee payments of their bonds. In contrast, opponents argued the resolution authorizing the issuance of these bonds was an obligation of Puerto Rico’s retirement system‒not the Commonwealth, and creditors were going beyond contractual rights in forcing the government to make appropriations from the general fund and remit them as employer contributions. An attorney representing the retirement system argued the ERS security interest filings were defective in reference to claims by bondholders that they have a right to receive employer contributions; however, an attorney representing the PROMESA Board countered that just because the collateral to their municipal bonds has been reduced, those bondholders are not entitled to such protection, testifying: “What is the claim worth when you have the GOs saying ‘we get all the money because we are in default.’”

Due to Puerto Rico’s perilous fiscal condition, it currently is making pension payments, for the most part, on a pay-as-you-go basis: public corporations and municipalities are making their employer contributions; however, those contributions are going into a segregated account; in addition, the fiscal plan contemplates making public corporations and municipalities similarly transform to a pay-go pension system—with the Territory supporting its position before Judge Swain by its police power authority.

The State of Puerto Rico’s Municipalities. The Puerto Rico Center for Integrity and Public Policy has reported that Puerto Rico’s municipal government finances deteriorated in FY2016 after improving in the prior two fiscal years. Arnaldo Cruz, a co-founder of the Center, said the cause of the deterioration was likely related to the election year, based on the collection of data and responses from 68 of the territory’s 78 municipios. Mr. Cruz added that the ten non-responders happened to be ones which had received D’s and F’s in past years. The updated study found that 30 municipalities nearly have the muncipios received more than 40% of their general fund revenue from the central government—mayhap presaging fiscal mayhem under the PROMESA Board’s intentions to eliminate such state aid to local governments over the next two fiscal years—i.e,: a cut of some $428 million. Such severe cuts would come even as the study found that more than half the muncipios realized a decrease their net assets last year, and half realized a decrease in their general fund balance—even as 27 municipios allocated more than 15% of their general fund income to debt repayment.

According to the March fiscal plan, Puerto Rico’s municipalities have:

  • $556 million in outstanding bond debt;
  • $1.1 billion in loans to private entities; and
  • Owe $2 billion to Puerto Rico government entities, primarily the Government Development Bank for Puerto Rico.

Mr. Cruz notes a potentially greater fiscal risk is related to Government Development Bank loans, which Puerto Rico’s municipalities continued to receive last year: last month, however, the Puerto Rico Senate approved a bill to allow the municipalities to declare an emergency and declare a moratorium on the payment of their debt. The fate of the effort, however, is uncertain, because the legislation died when the legislature adjourned before House action—mayhap to be taken up next month when they reconvene.

Disparate Fiscal Solvency Challenges

06/23/17

Good Morning! In this a.m.’s eBlog, we consider the serious municipal fiscal challenges in Ohio, where the decline in coal-fired power has led Adams County auditor David Gifford to warn that if its existing power plants close, the county could be forced to raise its property tax rates at least 500% in order to make its requisite school district bond interest payments. Then we turn to the steep fiscal trials and tribulations of implementing San Bernardino’s post-chapter 9 exit, before finally considering the governing challenges affecting the City of Flint’s physical and fiscal future, and then to the criminal charges related to Flint’s fiscal and moral insolvency. Finally, we turn to the potential for a new fiscal chapter for the nearly insolvent Virginia municipality of Petersburg.

Fiscal Municipal Distress in Coal Country. While President Trump has stressed his commitment to try to protect the U.S. coal industry, less attention has been focused on the municipal fiscal challenges for local elected leaders. For instance, in Adams County, Ohio, where the median income for a household is about $33,000, and where approximately 20% of families fall below the federal poverty line, the county, with a population near 22,000, has been in fiscal emergency for more than two years—making it one of 23 such jurisdictions in the state.  But now its auditor, David Gifford, warns that if its coal-fired power plants close, the county could be forced to raise the property tax by at least 500% in order to make the bond payments on its public school districts debt. (In Ohio, when so designated, the average time a municipality spends in fiscal emergency averages about five years.) Since 1980, when the state auditor was empowered to place municipalities in fiscal emergency, Ohio has declared and released 54 communities—with time spent in fiscal emergency averaging five years, albeit the Village of Manchester in Adams County (approximately 2,000 residents) holds the record for time spent in fiscal emergency — nearly 20 years and still counting. Over the past five years, some 350 coal-fired generating units have closed across the country, according to the Energy Information Administration: closures, which have cost not just jobs, but key tax revenues vital to municipal solvency. It is uncertain whether any actions by the White House could make coal viable as a source of energy generation; it is clear that neither the Trump Administration, nor the State of Ohio appear to have put together fiscal options to address the resulting fiscal challenges. Ohio Municipal League Director Kent Scarrett, in testimony before the Ohio Legislature last February, on behalf of the League’s 733 municipal members, in which close to 90% of Ohio’s citizens live, reminded legislators that “a lack of opportunity to invest in critical infrastructure projects” and “the myriad of challenges that present themselves as a result of the escalating opioid epidemic,” would require “reigniting the relationship between the state and municipalities.” 

Post Municipal Bankruptcy Challenges. San Bernardino Mayor Carey Davis this Wednesday declared the city’s municipal bankruptcy process officially over, noting San Bernardino had come “to the momentous exit from that process,” a five-year process which resulted in the outsourcing of its fire department to San Bernardino County, contracting out waste removal services, and reductions in healthcare benefits for retirees and current employees to lessen the impact on pensions. Mayor Davis noted: “The proceedings guided us through a process of rebuilding and restructuring, and we will continue to rebuild and create systems for successful municipal operations,” as the City Council confronted by what City Manager Mark Scott warned was “without a doubt among the lowest in per capita revenues per capita and in city employees per capita,” yet still confronted by what he described as:  “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Nevertheless, the Council adopted its first post-chapter 9 budget—a budget which is projected to achieve a surplus of $108,000, sufficient to achieve a 15% reserve. To give a perspective on the fiscal challenge, Mr. Scott warned the Mayor and City Council: “Among California’s largest cities, San Bernardino is without a doubt among the lowest in government revenues per capita and in city employees per capita…Furthermore, our average household income is low and our poverty rate is high.” Adding that San Bernardino’s property values and business spending are lower than other cities, contributing to its low revenue, he added: “At the same time, it costs roughly the same to repair a street in Rancho Cucamonga as in San Bernardino: California’s tax system rewards wealth.”

Nevertheless, even though San Bernardino’s plan of debt adjustment calls for minimal revenue growth over the next two decades, he advised that the plan is focused on making the city more attractive. Ergo, he proposed three criteria: 1) urgent safety concerns, including the relocation of City Hall to address unreinforced masonry concerns; 2) restoration of public safety, 30 new police officers, vehicle and safety equipment replacement, radio maintenance, and a violence intervention initiative; 3) greater efficiencies, via information technology upgrades, and economic development and revenue growth—to be met by hiring a transportation planner, associate planner, grant-writing, and consulting. In addition to the operating budget, the manager also focused on the city’s capital budget, proposing significant investment for the next two to three years. Some of these increased costs would be offset by reducing the city’s full-time city employees by about 4%. Nevertheless, the Manager noted: “The community’s momentum is clearly increasing, and we are building internal capacity to address our management challenges…We look forward to the next year and to our collective role in returning this city to a more prosperous condition.”

Under its plan of debt adjustment, San Bernardino began making distributions to creditors this month: Mayor Carey Davis noted: “From the beginning, we understood the time, hard work, sacrifice and commitment it would take for the city to emerge from the bankruptcy process,” in asking the Council to adopt the proposed $160 million operating budget and a $22.6 million capital budget.

Moody Blues. The fiscal challenge of recovering from municipal bankruptcy for the city was highlighted last April when Moody’s Investors Service analysts had warned that the city’s plan of debt adjustment approved by U.S. Bankruptcy Judge Meredith Jury would “lead to a general fund unallocated cash balance of approximately $9.5 million by fiscal 2023, down from a $360 million deficit the city projected in 2013 for the fiscal years 2013-23,” adding, however, that the city still faces hurdles with pensions, public safety, and infrastructure. Noting that San Bernardino’s plan of debt adjustment provided more generous treatment of its pension obligations than its municipal bondholders—some of its unsecured creditors will receive as little as 1% of what they are owed—and the city’s pension obligation bondholders will take the most severe cuts—about 60%–or, as Moody’s moodily noted: “The [court-approved] plan calls for San Bernardino to leave bankruptcy with increased revenues and an improved balance sheet, but the city will retain significant unfunded and rapidly rising pension obligations…Additionally, it will face operational challenges associated with deferred maintenance and potential service shortfalls…which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.”

The glum report added that San Bernardino’s finances put its aging infrastructure at risk, noting the deferral of some $180 million in street repairs and $130 million in deferred facility repairs and improvements, and that the city had failed to inspect 80 percent of its sewer system, adding: “Cities typically rely on financing large capital needs with debt, but this option may no longer exist for San Bernardino…Even if San Bernardino is able to stabilize its finances, the city will still face a material infrastructure challenge.”  Moody’s report added: “Adjusted net pension liability will remain unchanged at $904 million, a figure that dwarfs the projected bankruptcy savings of approximately $350 million.”

Justice for Flint? Michigan Attorney General Bill Schuette has charged Michigan Health and Human Services Director Nick Lyon with involuntary manslaughter and misconduct in office, making the Director the fifth state official, including a former Flint emergency manager and a member of Gov. Rick Snyder’s administration, to be confronted with involuntary manslaughter charges for their alleged roles in the Flint water contamination crisis and ensuing Legionnaire’s disease outbreak which has, to date, claimed 12 lives, noting: “This is about people’s lives and families and kids, and it’s about demonstrating to people across the state—it doesn’t matter who you are, young, old, rich, poor, black, white, north, south, east, west. There is one system of justice, and the rules apply to everybody, whether you’re a big shot or no shot at all.” To date, 12 people have died in the wake of the switch by a state-appointed Emergency Manager of the city’s drinking water supply to the Flint River—a switch which led to an outbreak of Legionnaires’ disease that resulted in those deaths. Flint Mayor Karen Weaver, in response, noted: “We wanted to know who knew what and when they knew it, and we wanted someone to be held accountable. It’s another step toward justice for the people Flint,” adding that: “What happened in Flint was serious: Not only did we have people impacted by lead poisoning, but we had people who died.”

In making his charges, Attorney General Schuette declined to say whether he had subpoenaed Governor Rick Snyder—with the charges coming some 622 days after Gov. Snyder had acknowledged that Flint’s drinking water was tainted with lead—and that the state was liable for the worst water tragedy in Michigan’s history—a tragedy due, in no small part, from the state appointment of an emergency manager to displace the city’s own elected leaders.

The state Attorney General has charged HHS Director Lyon in relation to the individual death of Robert Skidmore, who died Dec. 13, 2015, “as a result of [Mr.] Lyon’s failure to warn the public of the Legionnaires’ outbreak; the court has also received testimony that the Director “participated in obstructing” an independent research team from Wayne State University which was investigating the presence of Legionella bacteria in Flint’s water. In addition, four defendants who have been previously charged, former Flint Emergency Manager Darnell Earley, former Michigan Department of Environmental Quality drinking water Director Liane Shekter-Smith, DEQ drinking water official Stephen Busch, and former City of Flint Water Department manager Howard Croft, each now face additional charges of involuntary manslaughter in Mr. Skidmore’s death—bringing, to date, 15 current or former Michigan or Flint city officials to have been charged.

Attorney General Scheutte, at a press conference, noted: “Involuntary manslaughter is a very serious crime and a very serious charge and holds significant gravity and weight for all involved.” He was joined by Genesee County Prosecutor David Leyton, Flint Water Investigation Special Prosecutor Todd Flood, and Chief Investigator Andrew Arena. (In Michigan, involuntary manslaughter is punishable by up to 15 years in prison and/or a $7,500 fine.) The announcement brings to 51 the number of charges leveled against 15 current and former local and state leaders as a result of the probe during which 180 witnesses have been interviewed—and in the wake of the release this week of an 18-page interim investigation report, which notes: “The Flint Water Crisis caused children to be exposed to lead poisoning, witnessed an outbreak of Legionnaires’ disease resulting in multiple deaths, and created a lack of trust and confidence in the effectiveness of government to solve problems.”

A New City Leader to Take on Near Insolvency. Petersburg, Virginia has hired a new City Manager, Aretha Ferrell-Benavides, just days after consultants charged with the fiscal challenge of extricating the city from the brink of municipal bankruptcy advised the Mayor and Council the municipality needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies: increased taxes, they warned, would not do the trick; rather, in the wake of a decade of imbalanced budgets that drained the city’s rainy day funds, triggered pay cuts, disrupted the regional public utility, and forced steep cuts in public school funding, the city needed a new manager. Indeed, on her first day, Ms. Ferrell-Benavides said: “To have the opportunity to come in and make a difference in a community like this, it’s worth its weight in gold.” The gold might be heavy: her predecessor, William E. Johnson III, was fired last year as the city fiscally foundered—leading Mayor Sam Parham to note: “We’re looking forward to a new beginning, better times for the city of Petersburg.”

Manager Ferrell-Benavides won out in a field of four aspirants, with Mayor Parham noting: “She was definitely head and shoulders above the other candidates…She had clear, precise answers and a 90-day plan of action,” albeit that plan has yet to be shared until after she meets with department heads and residents in order to get a better understanding of the city’s needs. Nevertheless, City Councilman Charles Cuthbert noted: “Her energy and her warm personality and her expressions of commitment to help Petersburg solve its problems stood out…My sense is that she truly views these problems as an opportunity.” In what will mark a fiscal clean slate, Manager Ferrell-Benavides will officially begin on July 10th, alongside a new city Finance Director Blake Rane, and Police Chief Kenneth Miller, who is coming to Petersburg from the Virginia Beach Police Department. She brings considerable governmental experience, including more than 25 years of work in government for the State of Maryland, the Chicago Public Housing Authority, the City of Sunnyvale, Calif.; and Los Alamos, New Mexico—in addition to multiple jobs with the District of Columbia.

 

Getting Back in like Flint

Good Morning! In this a.m.’s eBlog, we consider the lessons learned from Flint—lessons that were not unrelated to the largest municipal bankruptcy in U.S, history in Detroit.

Immunity for State & Municipal Employees: What Does it Mean in Flint? U.S. Judge Judith Levy, in her 101-page decision this week, held that Flint and Michigan employees can be sued over the city’s lead water contamination; however, she found that Michigan Governor Rick Snyder and the State of Michigan have governmental immunity. The ruling came in response to a suit brought by a resident of Flint, against Gov. Snyder and 13 other public officials. Judge Levy dismissed many of the counts; however, she concurred that Flint resident Shari Guerin, who had brought the suit against the city and the other public officials, had had both her and her child’s “bodily integrity” unknowingly exposed by the dangerous levels of lead in Flint’s drinking water—levels of which the state was aware, but had hidden from the public. Indeed, the Judge wrote: “The conduct of many of the individual governmental defendants was so egregious as to shock the conscience.” Despite dismissing the charges against the Governor, the Michigan Departments of Environmental Quality and Health and Human Services—and the city’s water treatment plant operator, Judge Levy found that some key state leaders, including the state’s Chief Medical Executive and Health and Human Services Director could be sued in their individual capacities—and that Flint officials have no state governmental immunity, writing: “As this case highlights, the more governmental actors that are involved in causing a massive tort in Michigan, the less likely it is that state tort claims can proceed against the individual government actors given the way the state immunity statutes operate…Because the harm that befell plaintiffs was such a massive undertaking, and took so many government actors to cause, the perverse result is that none can be held responsible under state tort law.”

A Vicious Fiscal Whirlpool? For the city, the severe water contamination had not just physical fiscal implications, but also fiscal ones. Indeed, one of the plaintiffs was one of nearly 8,000 homeowners who was in danger of losing homes under tax foreclosure proceedings (Real property tax delinquency in the state entails a three-year forfeiture and foreclosure process)—proceedings which had been scheduled to commence last week until the Flint City Council approved a one-year moratorium—a moratorium which covered residents with two years of unpaid water and sewer bills going back to June 2014. While that temporary reprieve is in question, confronting an unknown outcome before the state-appointed Receivership Transition Advisory Board, which has monitored Flint’s finances since the city’s emergence from state oversight in two years ago last April—and is scheduled to vote on the moratorium at its June meeting; the outstanding water liens and inability to collect have further emptied the city’s coffers—even as, unsurprisingly, assessed property values  have become the latest fiscal hardship as an impoverished Flint still reels from a lead-in-water crisis which was first publicly acknowledged less than two years ago.

According to a recent Michigan State University study, “Flint Fiscal Playbook: An Assessment of the Emergency Manager Years, 2011-2015),” Flint has lost nearly 75 percent of its tax base—and of that base, assessed property valuations reeled to a 50 percent drop from $1.5 billion to $750 million.  Thus, unsurprisingly, more than 100 residents showed up at this week’s Council meeting—understandably upset that they face foreclosure even as they have been confronted by bills for drinking water, which they could neither drink, nor use in any way that might jeopardize the health and safety of their children. Those citizens received a temporary, one-year reprieve from the city—but the reprieve implies greater fiscal challenges to the city.

With liabilities high and revenues and property taxes struggling, Flint Mayor Karen Weaver reports that Flint has trimmed $2 million in annual garbage collection expenses by rebidding the service; expects to cut annual water expenses to $12 million from $21 million; and, due to federal grants, is hiring 33 more firefighters. The city is proceeding with a $37 million renovation of the Capitol Theatre downtown, seeking to create a central, historic space which could enhance the downtown—or, as the Mayor puts it: “I don’t think people should take their eyes off Flint.”

But assessing the dimensions of this disaster, created in no small part under the state’s original takeover of the city via the appointment of the emergency manager who had made the fatal decisions to change the city’s sourcing of drinking water, also includes looking back to the critical governmental decisions—especially Flint’s opting to abandon reliance on the  Karegnondi Water Authority (KWA) and instead rely upon the Great Lakes Water Authority (GLWA), a regional water authority created as part of Detroit’s chapter 9 plan of debt adjustment—meaning Flint’s citizens will keep drawing Detroit water from their taps—or, as the Mayor put it: “Staying with our water source gives us reassurance our water is good…It gets us out of our $7 million (annual) debt to the KWA. We did not have the finances to be able to do that.” Under the city’s 30-year agreement with the  30-year deal with GLWA, the city will receive a $7 million annual credit equal to its annual municipal bond payment to KWA for as long as Flint remains current with scheduled debt service. In addition, the agreement also enables the city to redirect water plant improvements to upgrading the city’s water distribution system—or, as Mayor Weaver notes: “We have pipes going into the ground now (referring to the planned replacement of lead service lines).We’re addressing this water crisis. The water quality is better. There are some good things going on.”

Mayor Weaver notes Flint has cut its $2 million in annual garbage collection expenses by rebidding the service; the city expects to cut annual water expenses to $12 million from $21 million; and the city continues to work with the Governor to address the public health concerns associated with the Flint water crisis. To try to become an economic magnet or hub, rather than a city to be avoided, the city is focused on a $37 million renovation of the Capitol Theatre, creating a central, historic space which could draw folks to events, restaurants, and bars. As the Mayor puts it: “I don’t think people should take their eyes off Flint…They should know the rest of the story. One of the things I’ve learned is we were going to get more done if we work together. If people are going to help you, why would you not sit down and work things out?”