Municipal Governance: The Challenges of Severe Fiscal Distress

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eBlog, 11/30/16

Good Morning! In this a.m.’s eBlog, we consider the difficult trials and tribulations of governance in a municipality confronting severe fiscal distress—in this case in the historic municipality of Petersburg, Virginia, before heading West to San Bernardino where the old expression “When it rains, it pours,” might be an apt description as a physical rather than fiscal earthquake appears to be adding to the city’s fiscal challenges as it seeks to emerge early next year from the nation’s longest ever chapter 9 municipal bankruptcy. Then we journey back to Ohio, where a municipal election next week in the virtually insolvent municipality of East Cleveland appears to offer little optimism of any resolution of its insolvency. Then we continue east to Connecticut, a state now confronting serious fiscal pressures. Finally, we head south, not to escape winter, but rather to observe the difficulty of governance created by a federal oversight board and an incoming new Governor.    

Is It a Municipal Government of the People? The ACLU of Virginia released a letter Monday criticizing the Petersburg City Council for meeting practices it said violate “the spirit of open government laws.” The organization claimed the City Council over-relied on special meetings, sometimes called at the last-minute, during the work day, or held in cramped quarters, to vote on matters of governance and financial management even as the city veered into insolvency. In the letter, ACLU executive director Claire Guthrie Gastañaga warned: “Holding meetings at inconvenient times and in small spaces that cannot accommodate the public violates the spirit of open government laws that serve to promote an increased awareness by all persons of government activities and afford every opportunity to citizens to witness the operations of government.” Part of the reaction reflects the growing anger of city residents and taxpayers with regard to the ways in which the Mayor and Council allowed the fiscal crisis to grow unattended—and then to hire at steep prices turnaround specialists from Washington, D.C. Indeed, some believe that the Council’s decision to hire the Robert Bobb Group—especially the way it did so—to try to avert insolvency and potential chapter 9 bankruptcy violated the municipality’s own rules and possibly the city charter, because of the procedure of forcing the matter to a second vote days after an initial vote for the partnership failed to pass, with two council members absent. The Petersburg City Council’s rules require a month delay; the city’s charter provides that a reconsideration vote must have as many members present as were there for the initial vote. The city attorney has defended the vote, asserting that nothing illegal or untoward transpired during the second consideration of the Bobb Group contract, which sealed the $350,000, five-month fee from the nearly bankrupt municipality with the firm. The aftertaste led citizens to publicly lambaste Mayor W. Howard Myers at a council meeting following the vote: now those citizens are actively circulating a recall petition to force the Mayor to step down. As Barb Rudolph, an organizer of the community group Clean Sweep Petersburg, put it: “For the many citizens of Petersburg who want to better understand what our elected leaders are deciding and why, this letter is most welcome…It puts City Council on notice that they can’t hide behind their misinterpretation of FOIA laws and inadequate commitment to open government.”

The vote last month on hiring the Bobb Group took place at one of 13 special meetings called by the City Council between March and October, according to the ACLU’s review. The Council publicized some in advance as being called solely for closed-session discussions, which “has the result of suppressing interest in attending and participating,” according to Ms. Gastañaga, who is pressing for the Council to be more open and resort less to executive sessions, or, as she puts it: “Even if legally permitted, the Council should hold all meetings in public unless there is a specific and important policy reason for the Council to meet outside of the hearing of the residents and public the Council was elected to serve.”

A Physical, not a Fiscal Quake. San Bernardino municipal employees are one step closer to completely moving out of City Hall, not because of the city’s chapter 9 bankruptcy—from which the city expects to emerge next March, but rather in response to a substantial earthquake risk: the City Council voted 7-0 Monday night to authorize City Manager Mark Scott to lease office space in two adjacent buildings in the wake of seismic experts’ warnings that the 43-year-old City Hall building is likely to collapse during a strong earthquake. The plan is to seek a grant to retrofit City Hall so that it could comply with modern earthquake standards and employees can return; however, for the municipality hoping to emerge from the nation’s longest chapter 9 municipal bankruptcy early next year, the physical disruption will be costly: it will take more than $14 million and an extended period of time, according to the city’s engineering study. Moreover, because the city was unable to obtain a lease for less than two years, the city will pay a total of $42,688 and $21,566—per month for the first year of the two-year lease, and a bit more for the second year. Additional costs associated with the move, including Information Technology costs and a moving company, approach $500,000, according to the staff report. Mayhap unsurprisingly, the plan was blasted at a Council session Monday by all of the members of the public who spoke—with one member of the public telling the Mayor and Council: “Anybody that votes yes on (the lease proposal) at this time, with as little studying as has been done, deserves to be removed from their office.”

The city, now addressing its fiscal earthquake, has received two independent engineering evaluations, in 2007 and 2016, which warn that City Hall sits atop two large faults, making it unsafe in an earthquake. The February study concluded that a magnitude 6.0 earthquake would lead to “a likelihood of building failure” for City Hall, which was designed before code updates following the 1971 Sylmar and 1994 Northridge earthquakes. With a greater than 90 percent chance of an earthquake of 6.0 or greater striking the region within 50 years, it would appear that steps not anticipated in the city’s chapter 9 plan of debt adjustment will require spending not included in that plan—spending not well received by the city’s taxpayers, who fear such spending will likely come at the expense of what they already complain is inadequate spending to combat crime, homelessness, and other issues. Moreover, the time contemplated—nine years—has added to citizen frustrations. Or as one citizen testified before the Council referring to the seismic information provided to the city nearly a decade ago: “Nine years?…I’ve heard of slow bureaucracy, but what kind of an emergency is it, if it’s nine years down the road?”

Municipal Integrity. The old expression that “when it rains, it pours,” might be apt for East Cleveland Mayor Gary Norton, who is seemingly waiting for Godot—that is, the State of Ohio to respond to the City’s request for authorization to file for chapter 9 municipal bankruptcy, but, instead, is confronted by an Ohio state board’s large fines for filing incomplete and late campaign finance reports related to next week’s municipal elections—in this case a recall election. Last month, the Ohio Elections Commission fined the Mayor $114,000—nearly sextuple the levy imposed by Ohio’s Attorney General last year. The most recent fines were levied in response to complaints from the Cuyahoga County Board of Elections that Mayor Norton did not file an annual report for 2015, turned in his 2014 report late, and did not resolve issues with his 2013 reports. In a series of letters, the Board of Elections asked Mayor Norton to fix a number of discrepancies in his 2013 reports—including incorrect fundraising totals and missing addresses. The board also requested proof of mileage, bank fees, phone expenses, and other spending for that year. Mayor and candidate Norton also is confronted by complaints over several missing finance reports from years prior to 2013, according to elections commission case summary records. Many of those reports have since been submitted and posted on the county board of elections website: a year ago last August, the elections commission imposed a $20,000 fine in connection with many of those cases. Mayor Norton’s last reported fundraising was in 2013, when he won a second term. He reported raising no money in 2014. Election commission fines balloon quickly. Mayor Norton’s grew by $100 for every day the problems remained unaddressed.

State Fiscal Sustainability? In Connecticut, where the state motto is Qui transtulit sustinet, or he who is transplanted still sustains, fiscal sustainability appears to be uncertain. Indeed, downgrades and related underperformance of the state’s debt are anticipated in the near-term, in no small measure due to weaker than expected revenue performance and rising fixed costs. The state confronts an expected expenditure reduction of more than 12 percent in FY2018, or $1.2 billion in non-fixed costs in FY18—a fiscal gap made more stressful because this year’s state budget relied on nearly $200 million in non-recurring revenues. The state’s Office of Fiscal Accountability recently revised state income and sales and use tax estimates down for FY17 by an aggregate of -$115.4 million; general fund revenues for FY18 are expected to post a decline of approximately $190 million from FY17 and aggregate revenue growth assumptions for FY19 and FY20 have also been downgraded. A significant factor has been fixed costs, especially from public pension obligations and other post-employment or OPEB benefits—in addition to municipal debt service and entitlements—which, together—like a Pac-Man are projected to account for 53% of expenditures in FY18. The state projects that pensions, OPEB, and debt service costs will rise by nearly 15%, while entitlements grow by nearly 5% in FY18. Worse, anticipated higher interest rates will add to future fixed costs in the form of debt service costs, while at the same time reducing bond premiums which the state has used over the past several years to reduce debt service appropriations. If there is any upside, it is that Connecticut has fully funded its pensions since 2012, albeit it has computed the liability using a relatively aggressive discount rate of 8 percent. Should the funds return less than this rate, pension costs will rise more than projected as the higher liability is amortized.

The Promise of PROMESA. Our insightful colleagues at Municipal Market Analytics note that the federally created PROMESA board has demanded that any fiscal reform plan adopted by the U.S. territory of Puerto Rico be:

  • honest with regard to any incremental federal aid Congress and the new Trump administration might provide,
  • that recurring revenues must actually be set to afford recurring expenses and vice-versa, and
  • that traditional capital market access cannot be assumed, but rather must be cultivated through balanced settlements.

MMA noted this to be “an unexpectedly earnest expression by the board and a very positive development for Puerto Rico in the long-term, although it also exacerbates short-term volatility by making standard extend-and-pretend restructuring strategies more difficult to pull off.” In response (or really non-response), outgoing Alejandro Javier García Padilla noted that although his own plan assumes massive injections of new federal aid, leaves current commonwealth spending levels unchanged, and disregards the market access issue entirely; he would not be submitting an amended version—a response that makes more difficult the PROMESA Board’s ambitious December 15th deadline for submitting its plan. MMA perspicaciously notes that the federal oversight board’s perspective could also pose a threat to the recent price appreciation in Puerto Rico’s municipal bonds, noting that to the extent to which the Commonwealth, nearing next month’s change of administrations, is forced to meaningfully address its massive structural budget deficit, there will be little room to project payment of debt service in the near– or medium-terms, with MMA noting: “In theory, more sustainable projections will reduce the size of any bondholder recovery, but will allow for higher bond ratings once a restructuring has been completed. Adding to medium-term issues, an acceptable plan’s likely need for sweeping layoffs, service austerity, and, potentially, pension payout reductions increases the potential for social unrest on the island: a development that will aid no parties besides partisans for independence.”  

Is There Promise in PROMESA? The Puerto Rico PROMESA Financial Oversight and Management Board has appealed a U.S. District Court ruling that stopped it from intervening in several consolidated suits filed against the government, having filed a motion in October to intervene in four consolidated lawsuits in order to make known its views on the plaintiffs’ pending motions to lift the automatic stay imposed under §405 of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). Thus, two weeks ago, U.S. District Court Judge Francisco Besosa denied the oversight board’s request to intervene in the suits filed by U.S. Bank Trust, Brigade Leveraged Capital Structures Fund Ltd, National Public Finance Guarantee Corp. and the Dionisio Trigo group of bondholders—a suit in which the plaintiffs were challenging the constitutionality of the Moratorium Act, which stopped payments to bondholders. Judge Besosa, early this month, had upheld a block on creditors’ ability to file lawsuits against the government of Puerto Rico in an attempt to extract repayment on defaulted municipal bonds to give time to the territory to restructure its $69 billion debt load—with the stay order part of the PROMESA Act: Judge Besosa consolidated the lawsuit filed by Altair with the suits by three other claimants and imposed a stay on them, writing: “The Court hastens to add that the Commonwealth defendants must not abuse or squander the ‘breathing room’ that the Court’s decision fosters. The purpose of the PROMESA stay is to allow the Commonwealth to engage in meaningful, voluntary negotiations with its creditors without the distraction and burden of defending numerous lawsuits.” (Besides Altair, the lawsuit was brought by Peaje Investments LLC and Assured Guaranty Corp against the government and outgoing Governor Alejandro Garcia Padilla.)

Unpromising? Puerto Rico Governor-Elect Ricardo Rosselló has opted to select his campaign manager, Elías Sánchez Sifonte, to replace public finance veteran Richard Ravitch as Puerto Rico’s non-voting representative to the PROMESA Oversight Board. Commencing next year, Senor Sánchez Sifonte will replace Mr. Ravitch, and losing the experience and expertise of a public finance veteran of the Detroit oversight board, as well as someone who played a key oversight role in the cases of both New York City and Washington, D.C. Mr. Sánchez Sifonte has held a variety of positions in recent years. Most recently he was campaign manager for Gov.-elect Rosselló’s bid for governorship. Prior to that he was human resources director for the city of Toa Baja, which according to the El Nuevo Día news web site had a payroll from $16 million to $23 million per year in the last 10 years. Senor Sifonte, a Republican, is a licensed attorney and provided legal advice to the Puerto Rico Senate from 2009 to 2011. He has run Veritas Consulting since 2011. According to El Nuevo Día he worked as a lobbyist to the Puerto Rico legislature without properly being registered as a lobbyist.

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Balancing Fiscal & Physical Futures in Municipal Bankruptcy

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eBlog, 10/04/16

Good Morning! In this a.m.’s eBlog, we consider yesterday’s decision by the U.S. 6th Circuit Court of Appeals in favor of the City of Detroit in a challenge to the reductions the city made as part of its plan of debt adjustment affecting retirees’ benefits; then we look east where time is fast running out on some resolution to Atlantic City’s fiscal disharmony, before journeying just north of Atlantic City to New York City, where the first PROMESA oversight board meeting occurred to begin to seek to unravel Puerto Rico’s insolvency has commenced. Finally, we head back west to observe how the fiscal insolvency of East Cleveland is now putting human lives at increasing risk.

Preserving a Future. The U.S. 6th Circuit Court of Appeals has ruled in favor of Detroit in a lawsuit brought by city retirees whose pensions were reduced as part of Detroit’s plan of debt adjustment to emerge from the largest municipal bankruptcy in U.S. history two years ago (In its approved plan of debt adjustment, Detroit had proposed reducing payments to its retirees by $7.8 billion, as well as $4.3 billion in retirement health care benefits.) The 4.5 percent reduction led some retirees to sue, claiming three years ago they deserved the pension they had been promised before the city filed for bankruptcy in 2013. In Judge Alice Batchelder’s 2-1 decision yesterday, however, she noted it was “not a close call,” with the majority finding that altering the pension cuts would be a “drastic action” which “would unavoidably unravel the entire plan, likely force the city back into emergency oversight and require a wholesale recreation of the vast and complex web of negotiated settlements and agreements.” In her dissent, Judge Karen Nelson Moore wrote that the city’s retirees deserved their day in court, writing that they have been left “with the impression that their rights do not matter,” adding that Judge Batchelder and Judge David McKeague were citing a “questionable” legal standard to dismiss the case—and noting: “It has real-world consequences for the litigants before us — retirees who spent their lives serving the people of Detroit through boom and bust, and who feel that the city’s bankruptcy was resolved through a game of musical chairs in which they were left without a seat.” The court’s decision to reject the pensioners’ claims came after the state-mandated Financial Review Commission last month reported the city was in compliance with the Commission’s annual requirements to meet financial milestones. Indeed, if a January audit confirms it, then the Motor City would have just one more fiscal year to demonstrate good budget practices, and the state would consider lifting the demands that an outside board approve Detroit’s fiscal spending. Indeed, it seems the court’s decision could mark one of final remaining legal fights from the landmark case, which had multiple appeals pending in the U.S. Court of Appeals over the last year and a half.

Tempus Fugit. Time is running out for Atlantic City, with Moody’s reporting the city is in danger of missing its November debt service payment after it violated a term of a state bridge loan. Indeed, New Jersey’s Local Finance Board informed the city on September 22nd that it has until the end of Monday to cure the breach of a $73 million bridge loan agreement term that required dissolving the Atlantic City Municipal Utilities Authority by September 15th Moody’s had noted, writing that the technical default is a credit negative because it “indicates a disconnect between the city council, mayor, and state.” Instead, city officials had, as we reported, last week announced their own plan that would have the utility buy its closed Bader airfield from the city for about $100 million and asked state officials to wave the terms of the loan—a proposal which led Moody’s last week to term the city’s “impending technical default” as a credit negative, indicating “a disconnection between the city, mayor, and state.” The dysfunctional political gridlock now puts Atlantic City’s next municipal bond payment at risk, some $9.4 million due Nov. 4th, or, as Moody’s Doug Goldmacher put it: “Even if the city were to have market access, borrowing $100 million would increase debt by a factor of seven, raising the question of how the authority would pay for this debt — assuming the plan went through, which is far from certain.” Having already missed its state deadline to adopt a resolution to dissolve the Municipal Utilities Authority, the city could now be confronted by a state demand for immediate repayment of the $62 million already advanced. All of these accelerating demands come one month before Atlantic City is scheduled to submit a satisfactory five-year fiscal stability plan to the state, or risk state takeover. New Jersey could sell its assets and void or change labor contracts through expansive powers awarded by the legislation and signed by Governor Chris Christie when the state provided the loan.

For Mayor Don Guardian, who faces reelection in December, the runway ahead is perilous: first, the effort to capitalize the city’s airfield, the municipal utility authority (MUA), in order to borrow money, must appear before the Local Finance Board for “findings”—that is, the board can make “positive” or “negative” findings. (It seems there may have been maybe five cases of negative findings over the last two decades.) While negative findings would not bar Atlantic City from borrowing, such findings would likely impose higher borrowing costs. Of greater challenge, however, are a series of hurdles, including: 1) The city would need to file an application with the Local Finance Board, which would then need to schedule a hearing within 31 days of an application being filed, after which the LFB has 10 days to issue findings. (NJSA 40A:5A-6 and 7)—that is a schedule inconsistent with the timing to repay debts and submit a plan. It seems the city would have to prove that the proposed purchase of Bader Field meets complies with the statutory authority that an MUA has—a legal challenge which experts believe would be difficult to scale—and which would, in any case, likely trigger litigation—as well as consume the increasingly decreasing time frame for some resolution, e.g.: how to conclude these items in time to fulfill the municipality’s cash flow loan obligations to avoid another violation of the state loan agreement.

All of these pressures come, moreover, amidst the profound silence from the state: that is, while the state has set deadlines, it appears it has opted not to take a constructive role: it has, as one expert advised, been silent on the “state on all things Atlantic City.” That is, the state appears to have offered no opinion with regard to the failure to move forward on dissolving the MUA—an increasingly critical issue, especially were Atlantic City to end up in court defending the state’s action to move on the collateral the city “pledged” through the loan agreement. Under either path, moreover, there would be costly litigation and delay instead of a constructive path towards resolution.

To Takeover or Not to Takeover. In some sense, it would seem the state intent from the beginning has been aimed at a takeover of Atlantic City; however, such a takeover would not only be costly for the state, but also would raise substantial grounds for challenging its constitutionality: Article 4, Section 7 of the New Jersey Constitution provides:

  1. The Legislature shall not pass any private, special or local laws:

             (12) Appointing local officers or commissions to regulate municipal affairs.

            (13) Regulating the internal affairs of municipalities formed for local government and counties, except as otherwise in this Constitution provided.

Moreover, the New Jersey Constitution only allows special laws upon petition of the municipality.

La Vaina. The Puerto Rico Oversight Board created under the PROMESA legislation convened its first session—not in Puerto Rico—but in New York City, amid further fiscal deterioration in the U.S. territory, yet without any seeming intent to act swiftly: the Board’s first action was to look for a head hunter who would be hired to scout for an executive director for the Board—a remarkable contrast to Detroit, for instance, where Kevyn Orr, almost immediately upon his selection by Michigan Governor Rick Snyder, acted within 24 hours to ensure the operation of vital or essential public services—and the halt of non-essential services. In New York, the Board named José Carrión III chairman and ordered Puerto Rico’s government to provide a fiscal plan in October—and adjourned. For his part, Mr. Carrión, an official in the administration of former Puerto Rico Governor Luis Fortuño, stated: “We will strive to work in a collegial matter for the benefit of the people of Puerto Rico.” Board member David Skeel introduced the bylaws, which Mr. Skeel said were intended to be consistent with the Puerto Rico Oversight Management and Economic Stability Act. The board also worked to clarify the rules on voting. Ordinarily, measures will have to be passed with four votes even if not all the seven board members are present. The board voted to direct Puerto Rico’s government to provide about eight types of fiscal and financial information to the board on a regular basis—and for the Governor or his representative to provide a fiscal plan to the board by a week from Friday—a five-year plan which, under the new federal law is to address fiscal responsibility, access to capital markets, fund essential public services, funding for pensions, and a sustainable debt burden. Even though the initial meeting was in New York City, Chairman Carrión said a main office for the board will be in San Juan, where the Board is scheduled to meet in mid-November. For his part, Puerto Rico Gov. Alejandro García Padilla said that notwithstanding his opposition to the “excessive powers [Congress provided] to the board,” he had to agree to it, because the alternative would have been catastrophic for the government’s provision of human services. He added that the board was a product of years of unwise government borrowing and the economic contraction that Puerto Rico has experienced in the aftermath of federal tax law changes—adding that he had appointed municipal finance expert Richard Ravitch, who had played a key role in a similar oversight situation involving Washington, D.C., to argue for the interests of Puerto Ricans.

Emergency Abandonment? The small, virtually insolvent Ohio municipality of East Cleveland was left without an ambulance after a loaned vehicle from neighboring Mayfield Heights broke down last weekend—meaning that while the city’s firefighters can drive to a scene in their fire engine and give medical care, they were forced to become reliant on mutual aid from neighboring departments to transport anyone to the hospital. The city’s own three EMS vehicles are dysfunctional. The small, distressed municipality, in which all firefighters are paramedics, began using the Mayfield Heights ambulance last Friday, courtesy of Mayfield Heights’ recent approval of its donation to the city, pending acceptance from East Cleveland City Council.

Re-Thinking Municipalites’ Post-Bankruptcy Futures

eBlog, 9/14/16

In this morning’s eBlog, we consider the foundering fiscal state of the Detroit Public School system—a system so vital to the city’s long-term fiscal recovery; then we try to prep for next November’s elections in San Bernardino—its first post-bankruptcy election—when citizens will determine the city’s future charter. Can a city remake itself? Then we head east to another question about remaking of a city: for insolvent East Cleveland—and adjacent Cleveland, would consolidation make better sense than municipal bankruptcy? After that, we jet south to Dade County, Florida to ask what will be next – might it be municipal bankruptcy? – for the small municipality in Dade County of Opa-locka. Finally, we consider the inexcusably delayed state of the implementation of the new PROMESA law Congress adopted last June.

An Unpassing Grade? For the second time in two months, the Detroit Public Schools’ state-backed debt credit rating has been downgraded—raising apprehensions that the bonds may not be refinanced by the start of the state’s new fiscal year—with the schools already open, and that new fiscal year just 16 days away.  S&P Global Ratings wrote it had cut its rating on bonds held by the former Detroit public school district from BB to B for those issued in 2011 and BB- to B for those issued in 2012, noting: “The downgrade is based on the lack of a finalized plan regarding bondholder repayment terms following the district’s recent restructuring, and the resultant elimination of a pledged revenue stream at the end of the state’s fiscal year.” In her report, S&P credit analyst Jane Ridley noted: “Although the Michigan Finance Authority’s intent is to take out the existing debt at full value, in our view, as October looms closer and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment on their bonds.” Danelle Gittus, a spokeswoman for the Michigan Department of Treasury, attributed the downgrade to the $617 million rescue package: “The focus of the downgrade is on bonds that are being refinanced as part of the recent DPS legislation…This downgrade does not impact the ability to refinance the bonds. The Michigan Finance Authority continues to work on a financing plan to refund the bonds, which is expected to be completed later this month. Once the bonds are refunded, the rating becomes irrelevant.” What is, however, relevant, is that S&P has now displayed an increasing lack of confidence: it has cut its ratings on the Detroit school debt by six levels between late June and mid-August, placing them in junk status. The issue is if S&P is giving the system and state program such failing grades, what kind of message might that give to young families with kids who are thinking about moving into Detroit?

Actually, we are beginning to have the answer to that question, as, yesterday, lawyers representing Detroit schoolchildren filed suit against Gov. Rick Snyder and state officials in what they are terming the nation’s first federal case that pushes for literacy as a right under the U.S. Constitution: their complaint alleges that the state has denied Detroit students access to literacy — the most basic building block of education—through decades of “disinvestment…and deliberate indifference.” The suit seeks significant remedies, including a statewide accountability system in which the state “monitors conditions that deny access to literacy” and intervenes. In plain words, as attorney Mark Rosenbaum described it yesterday outside the U.S. District Court: “For the last 15 years, the state has run the Detroit schools, has run them into the ground.”  The suit documents the low reading and math proficiency rates of Detroit students, as well as classes without teachers and outdated or insufficient classroom materials; it also notes poor conditions, including vermin and building problems, at some schools as recently as this month. The seven plaintiffs are students listed by pseudonyms who attend some of Detroit’s lowest-performing schools, of which three are run by the Detroit Public Schools Community District. In addition to naming Gov. Rick Snyder as a defendant, the suit also names the Michigan state Board of Education, state school Superintendent Brian Whiston, David Behen, Director of the Michigan Department of Technology, Management and Budget, and Natasha Baker, the state school reform officer. In response, John Austin, President of the Michigan state Board of Education, said he did not believe the state board merited being the target of the suit, because it has made recommendations to the Governor and legislature for increased education funding — and it, itself, has no power to approve such funding—or, as he plainly put it: “It’s the Legislature that holds the purse strings, and the Governor who proposes budgets.” Indeed, for anyone who cares about Detroit’s long-term recovery from the nation’s largest ever municipal bankruptcy, Kathryn Eidmann, a staff attorney for Public Counsel, yesterday said attorneys in the case decided to focus on Detroit because it has the lowest proficiency rates of any large urban school district in the country on national assessment tests. The suit charges that students in Detroit do not have adequate supplies, the textbooks are outdated, classrooms are overcrowded, and school buildings are dangerous: or, as alleged in the suit: “In one elementary school, the playground slide has jagged edges, causing students to tear their clothing and gash their skin, and students frequently find bullets, used condoms, sex toys, and dead vermin around the playground equipment,” adding that students are taught by insufficient or unqualified staff, with many schools lacking properly trained teachers assigned to classes within their area of expertise. The suit charges that by its actions and inactions, “the State of Michigan’s systemic, persistent, and deliberate failure to deliver instruction and tools essential for access to literacy in plaintiffs’ schools, which serve almost exclusively low-income children of color, deprives students of even a fighting chance,” bringing its claims under the 14th Amendment of the U.S. Constitution and the Civil Rights Act.

Can a City Remake Itself? Leaders of the campaigns for and against implementing the proposed new city charter in San Bernardino are set to debate tomorrow evening as the city awaits next month’s likely exit from the nation’s longest ever municipal bankruptcy and then November’s election in which the city’s voters will consider Measure L, a proposal to replace the city’s existing charter. The debate, hosted by the Verdemont Neighborhood Association and moderated by Michael Craft, the association’s co-president and a member of the city’s charter review committee (Mr. Craft has been neutral on Measure L), will feature John Longville, president of the San Bernardino Community College District board of trustees and previously a member of the state Assembly and Mayor of Rialto versus James Penman, San Bernardino’s long-time (26 years) City Attorney until his retirement three years ago. The charter functions as the city’s constitution. The existing charter was first passed in 1905 and periodically amended, while the proposed new one was mostly based on a national model and how other mid-sized cities typically operate today. Three years ago, in our report, we noted—with regard to the charter: “In the estimation of most individuals, a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.”

Unlocking Opa-locka. David Chiverton, the former City Manager of insolvent Opa-locka, the small municipality of about 16,000 in Florida, plead guilty Monday to accepting pay-offs in his former capacity as city manager in entering a felony plea in federal District Court for improperly paying himself city benefits: his felony: extortion and accepting bribes; prosecutors charge Mr. Chiverton participated with other city officials to solicit pay-offs in exchange for using their official positions to help residents and businesses obtain city services and deal with billing issues. His plea is similar to one entered by the city’s former Public Works supervisor last month of guilt for bribery. In each instance, the former city officials have agreed to cooperate with investigators against other Opa-locka officials in return for lighter sentence recommendations. The pleas come as a Florida state financial oversight board is seeking to prevent Opa-locka from payment default on its bonds and, ultimately, filing for municipal bankruptcy. In Florida, one of eighteen states that authorize municipal bankruptcy, the statute §§218.01, requires that to file, a municipality must first receive prior approval from the Governor. While two utility and two transportation districts have previously filed, no Florida municipality ever has. Indeed, the state is already involved, with, as we have previously noted, Florida Chief Inspector General Melinda Miguel, chair of the Governor’s appointed state oversight board, having ordered city officials to develop procedures to segregate financial duties and prevent the kind of improper access Mr. Chiverton had obtained. (Note: Mr. Chiverton also faces an ethics complaint filed with Miami-Dade County for the benefit payouts.) Mr. Chiverton has also been accused of accepting bribes in return for using his influence to obtain city licenses and preventing water from being shut off for delinquent payments, according to court filings—this has been an exceptionally leaky problem for the city: after examination of its water and sewer accounts, the state oversight panel found Opa-locka’s collection rates are as low as 27% and that many properties are not even being billed—findings which contributed to the takeover of the billing by Miami-Dade County—which the small municipality has also requested to extend it a loan because Opa-locka’s general fund balance is so low it is projected to run out of funds soon to pay for basic services and make payroll.

Off to a Rocky Start? What Promise Is there in PROMESA? Last June, when Rep. Nydia M. Velázquez (D-NY) released her statement regarding the Senate passage of legislation allowing Puerto Rico to restructure its debt, she noted: “I know first-hand that the situation in Puerto Rico is extremely dire.  And as I stated on House passage, PROMESA is far from perfect, but it is better than the alternative of taking no action at all.  Debt restructuring is an essential first step – and without it, the island would not be able to move forward…Now that we have passed PROMESA, Congress has the legal and moral responsibility to come together again and finish its work regarding Puerto Rico. We must provide new tools so that the island can rebuild its economy for the long-term.  And, we have to resolve the island’s colonial status once and for all – without doing so, the people of Puerto Rico cannot truly move forward. In this regard, I look forward to working again with my colleagues to pass additional legislation in the coming months.” The implementation of PROMESA—especially the appointment of members of its oversight board, has, however, raised increasing questions about the federal commitment. The members were not named until August 31st; consequently, as the Board’s non-voting member, Richard Ravitch, yesterday noted after returning from Puerto Rico: members of the newly appointed Puerto Rico Oversight Board do not begin to fully understand or appreciate the depth of the fiscal problems they will have to address—comments he made both on the basis of his visits with senior Puerto Rican leaders and after talking with several of his colleagues on the oversight board; nevertheless, he noted: “I think they are going up a learning curve.” He added, he anticipates the board will probably hold its first meeting in Washington, D.C. next week—a meeting at which, presumably, he will report back on his meeting this week with Puerto Rico Gov. Alejandro García Padilla, who had advised him that Puerto Rico’s financial situation is substantially worse than it was this past winter, warning the government is in “deep” distress.

Will a City’s Residents Agree to Cede Autonomy? The ongoing uncertainty about insolvent East Cleveland’s future—whether it would be willing to cede its autonomy and control (not to mention a mostly-black community afraid of being subject to Cleveland’s police force, where, not unlike in Ferguson, the city has accepted and agreed to U.S. Justice Department exacting standards with regard to how and in which circumstances may its officers use force, as well as ongoing federal oversight—all as part of what the Justice Department has termed a pattern of unconstitutional policing and abuse, ergo triggering DOJ-mandated training in Cleveland—to be annexed or incorporated into the City of Cleveland is a harrowing issue—as well as one conflicted by Cleveland’s apprehensions that such incorporation would appear to create more negative fiscal downsides than upsides, both in terms of significant fiscal challenges, and significant new fiscal burdens on its police resources. Nevertheless, it might be that the discussion appears to be triggering what one blogger asked: should we be rethinking, after decades of glorifying the concept of home rule, that the accumulation of so many fragmented small political bodies makes fiscal sense. But, then, one has to consider not just the political challenges—but equity issues: does one propose to consolidate just the poor, struggling, disinvested entities together in one jurisdiction, but leave the well-off municipalities?  Last spring at my very favorite Lincoln Institute of Land Policy, at a journalist forum, Oklahoma City Mayor Mike Cornett spoke about his city’s amazing turnaround, followed by a searing speech from Sen. Dan Kildee (D-Mi.) contrasting the ways in which Flint been harmed by external forces. But the underlying issue is, when consolidating governments, it is one thing—as occurred in Oklahoma City—to annex wealthy enclaves and productive tax-generating areas. It is a whole other challenge to contemplate annexing adjacent jurisdictions with devastated tax bases and very high police needs.

Who Decides Post-Bankruptcy Futures?

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eBlog, 9/07/16

In this morning’s eBlog, we consider the risk that state legislative interference in Detroit’s public schools—even after the schools have opened—could have harsh fiscal consequences for a city emerging from the largest municipal bankruptcy in the nation’s history. Then we turn to the grim tidings from post-municipal bankrupt Stockton, where the incumbent mayor—and candidate for re-election in November, and who was Mayor when Stockton emerged from its chapter 9 municipal bankruptcy, is on trial, raising serious questions about his moral fitness for public office. Finally, we turn to the steps underway to initiate the promise of PROMESA, the quasi-chapter 9 legislation signed last month by President Obama to steer the U.S. territory of Puerto Rico out of insolvency–and to a very unique American leader whose contributions to Washington, D.C., New York City, and New York’s subway system are legend–and who now will utilize that experience and expertise to help the U.S. territory of Puerto Rico.

Who Will Decide Detroit’s Future?  Last year, not a single Detroit public school complied with Detroit’s public health and safety codes, one reason teachers protested with widespread sickouts that temporarily crippled the system. This year, 92% of schools are in full compliance; the more significant changes for the nation’s most challenged big-city school system, however, will be governance: who will be in charge of changes so critical to the city’s long-term fiscal recovery? There will be a learning process not just in the schools, but also between Detroit and Lansing, because the city’s kids are returning to a brand-new public school district—one no longer encumbered with mountains of debt, but one, however, encumbered by politics even as it struggles to overcome its physical and fiscal insolvencies.

As we have attempted to chronicle, Governor Rick Snyder last June signed a sweeping education package to provide financial support for Detroit’s public schools modeled on the 2009 restructuring of post-bankrupt General Motors: that legislation left the old Detroit public school district behind as a shell to pay down $515 million in operating debt, similar to GM’s Chapter 11 which had created an “old” and “new” General Motors, with the intent of restructuring a public school system that was all but bankrupt: the state allocated more than $600 million to repair the DPS’s aging facilities, and the legislation allowed the schools—which include some of the nation’s worst and have been under state-run emergency management since 2009—to return to a locally run school board. Or, as John Walsh, Gov. Snyder’s director of strategy put it: “DPS is fiscally sound now.” Today, Detroit has more than a third of the state’s lowest-performing schools, according to a recently released list from the state’s School Reform Office, which has the authority to close those schools after three consecutive years. But the state office has not closed any low-performing schools since it was created in 2010. The School Reform Office could close more than 100 failing schools that qualify for shuttering, which has spurred panic among parents, teachers and other education groups.

The issue comes to the fore in the wake of Governor Rick Snyder last June signing a sweeping education package to provide financial support for Detroit’s public schools modeled on the 2009 restructuring of General Motors. The legislation left the old district behind as a shell to pay down $515 million in operating debt, similar to GM’s Chapter 11 that created an “old” and “new” General Motors, with the aim of restructuring a public school system that was all but bankrupt. Millions of dollars were allocated to repair the district’s aging facilities, and the legislation allowed the schools—which include some of the nation’s worst and have been under state-run emergency management since 2009—to return to a locally run school board. “DPS is fiscally sound now,” says John Walsh, Gov. Snyder’s director of strategy. Snyder’s use of state-appointed emergency managers has been widely scrutinized since the water crisis in Flint, where lead leached into the municipal water supply while the city’s finances were being overseen by the state. The water crisis raised questions about Snyder’s reliance on state managers to step in and fix local issues. But the state legislation created a dual school system in the Motor City of charter and public schools—potentially undercutting the intent of ensuring that DPS will be able to provide quality education in the long-term to compete with the growing number of charter schools throughout Detroit. Indeed, there are apprehensions in the city that state legislative meddling might, unwittingly, have paved the way to potentially end the Detroit public schools altogether. Because the state legislation created not just a dual system of public versus charter schools, but also of dozens of authorizers who determine where charter schools can open or close—that is, outside of any coherent, local process, but rather one in which any number of authorizers who do not work together to plan comprehensively can create chaotic situations in some neighborhoods: according to Detroit Mayor Mike Duggan’s office, 80% of Detroit’s public and charter schools have opened or closed in the last seven years. This would hardly seem a bright, shining beacon to attract families with young children to want to move to Detroit.

Moreover, even as the state interference has created a seeming Charlie Chaplin gold rush to open up any number of uncoordinated charter schools, the state education package for Detroit fell far short in the math department: less than a sixth of the appropriated funds went to DPS for transition costs: indeed, Alycia Meriweather, DPS’s interim superintendent, reports that $105 million of the $150 million allocated to help get the new DPS up and running is already earmarked for financial obligations from the old Detroit Public School District, while only $5 million is available for repairing school facilities. While Detroit will be able to spend all of the $7,400 that is allocated per student on actual education costs this year—as opposed to last year, when $1,100 of that funding per student went to pay the district’s debt—the district still has needs that will not be met, including at least eight schools that still need facility upgrades.

The state package, because of the way it was imposed on Detroit, has already led fears of the city becoming divided: more than 51,000 children attended Detroit charter schools last year; less than 48,000 kids attended its public schools. There are apprehensions the state legislation is creating its own tale of two cities: one for low-income minority children, and one not; and raising the governance question: should the state or the city have a greater say in the city’s children’s futures? What seems growing clear is that running a school system is hard—but having dual managers with very different political perspectives seems to be putting children’s futures at stake. Arlyssa Heard, a member of 482Forward, a group of local parents who raise awareness about the state of the schools, perhaps has the best perspective: after all, she has a son who has started fifth grade this fall and has already been in three different Detroit schools so far—one public, one charter, one private. She notes: “We have people making decisions who do not have children here and don’t know anything about what educators are facing in the classroom…My dream is that there is some way to take this decision out of the hands of politicians and put it in the hands of educators and parents. Those are the two groups that have the most vested in the school system.”

Distant School Managers. No doubt, Ms. Heard is referring to the distant attempts at Detroit school governance emanating from the Michigan Legislature, where, yesterday, Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) said they would consider requesting that Michigan Attorney General Bill Schuette involve himself in a dispute between the state legislature and Gov. Rick Snyder with regard to how soon some of the worst schools in Detroit could be closed. That is, even though the Detroit Public Schools has both a gubernatorial appointed Emergency Manager and an elected public school board, the two Republican state leaders insist Detroit’s public schools can still be closed immediately if they have been among the state’s lowest five percent of performing public schools for three consecutive years. Gov. Snyder’s administration, however, relying on a law firm’s interpretation of the $617 million bailout legislation for DPS, contends that none of the city’s 47 schools that are in the bottom five percent for academic achievement can be closed until July of 2019. Indeed, last month, Gov. Snyder’s director of strategic policy had provided a memorandum to DPS Emergency Manager and retired U.S. Bankruptcy Judge Steven Rhodes which opined that the three-year countdown to close schools had been reset when DPS was transferred to a new debt-free district in July. Nevertheless, Majority Leader Meekhof yesterday disagreed; he said the law clearly allows a state office to close schools prior to that date and is “confused” how the Governor’s office could have reached a different conclusion. With the issue coming to a head, even as the school year has already commenced, Leader Meekhof also emphasized his Republican caucus would not likely support allowing Gov. Snyder’s interpretation of the law to stand and that passing a clarifying law would not be a good option because “a lot of folks have fatigue on Detroit issues.” This, apparently, passes as a reason for far away state legislators to preempt local authority—and disrupt an already chaotic school year.

Detroit has more than a third of the state’s lowest-performing schools, according to a recently released list from the state’s School Reform Office, which has the authority to close those schools after three consecutive years. But the state office has not closed any low-performing schools since it was created in 2010. The School Reform Office could close more than 100 failing schools that qualify for shuttering, which has spurred panic among parents, teachers and other education groups. Perhaps, appropriately, the last wise word should come from Chris Wigent, director of the Michigan Association of School Administrators, who opposes closing poorly performing school districts: “I think anytime you walk into a community and mention closing a school, that creates a lot of concern,” said “There is no data that shows moving a child from one school to another school has any positive” impact on students’ test scores.”

Post Municipal Bankruptcy Blues. With elections just around the corner in post-bankrupt Stockton, incumbent/candidate Mayor Anthony Silva’s attorney yesterday charged his client has been victimized by “outrageous government conduct,” as he sought the suppression of evidence from a warrantless federal search and seizure of his electronic devices nearly a year ago at San Francisco International Airport. The candidate/Mayor is scheduled this afternoon for his second court date since his arrest last month on charges he participated in and illegally recorded an alcohol-fueled game of strip poker with teenagers in 2015 at his annual summer youth camp in Silver Lake. The Mayor pleaded not guilty at his initial court appearance last month: he claims he is the victim of a political smear campaign being waged because he is a “threat” to Stockton’s establishment; however, the court proceedings come as he faces his colleague in his bid for re-election against City Councilman Michael Tubbs in November. The “outrageous government conduct” allegation referred to by Mayor Silva’s attorneys apparently refer to the website of the U.S. Attorney’s Office, claiming the conduct by law enforcement agents was “so outrageous that due process principles would absolutely bar the government from invoking judicial process to obtain a conviction.” However, Amador County Chief Assistant District Attorney Robert Trudgen said the government is confident in its case, though he acknowledged that the amount of discovery the defense has received to date has been sparse. If the role of municipal elected leaders—especially in municipalities emerging from chapter 9 municipal bankruptcy—is to inspire confidence, the road ahead in Stockton could be rocky.

Puerto Rico’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico yesterday announced it is extending to October 14th its deadline for interested stakeholders to submit recommendations on how to promote economic growth within the U.S. territory—extending the original deadline of last Friday: in part that appears to stem from the 300 plus submissions already received—none of which have, however, been made public. Congress crated the task force as part of the PROMESA law to explore critical issues related to potential improvements that could bolster job creation, reduce child poverty, and attract investment to the U.S. territory; it is distinct from the newly appointed seven-member oversight board charged with restructuring the island’s debt and fiscal future; it is chaired by Sen. Orrin Hatch (R-Utah) and includes Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), along with House members Pedro Pierluisi (P.R), Rep. Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y). The task force is charged with submitting a report by the end of this year which identifies any current impediments federal law and programs which might impede economic growth or healthcare coverage for the territory and, importantly, recommendations to fix them.  

Experience & Insight. Few Americans have better background or experience in the kind of expertise the Congressional Task Force was looking for than Richard Ravitch, who served on similar oversight boards for both Washington, D.C. and New York City. Ergo, unsurprisingly, Puerto Rico Gov. Alejandro García Padilla yesterday named the former New York Lt. Governor to represent his positions to the PROMESA oversight board, noting Mr. Ravitch has advised Puerto Rico’s government on an unpaid basis for three years. Under the new PROMESA statute, Gov. Padilla was authorized to either serve as a nonvoting, ex officio member of the board or to designate someone for this role. The governor has made clear his urgency in getting the new board to address the commonwealth’s fiscal problems—noting, especially, the urgency from his perspective of restoring democracy in Puerto Rico. Gov. Padilla noted, in his statement, that Mr. Ravitch has advised Puerto Rico’s government on an unpaid basis for three years.