The Governance Responsibility to Protect a City’s Children

October 10, 2018

Good Morning! In this morning’s eBlog, we report on the physical and fiscal challenges of the Detroit Public Schools, before zooming south to assess whether the complex municipal financing in Puerto Rico’s recovery has perhaps exacerbated the U.S. territory’s debt challenges.

Protecting a City’s Children. A key challenge in Detroit’s plan of debt adjustment from the nation’s largest chapter 9 municipal bankruptcy was restoring trust in its public schools—a critical step if families with kids were going to move from the suburbs into the emptied city. That, of course, required making the schools not just trustworthy places for learning, but also safe—and not just safe from a gang perspective, but especially here from water contamination—Flint, not so far away, after all, is on many parents’ minds. Thus, the school district is developing plans to make drinking water safe inside its buildings, especially after a review of testing data shows one school had more than 54 times the allowable amount of lead under federal law, while another exceeded the regulated copper level by nearly 30 times. The Detroit News reviewed hundreds of pages of water reports for 57 buildings which tested for elevated levels of lead and/or copper in the water to provide a detailed look how excessive the metal levels were in the most elevated sources.

The News effort comes as Detroit Public School Superintendent Nikolai Vitti noted: “‎We discontinued the use of drinking water when concerns were identified without any legal requirement to do so, and hydration stations will ensure there is no lead or copper in all water consumed by students and staff, with the Superintendent yesterday reported the system expects to spend nearly $3.8 million enacting a long-term solution to widespread lead and copper contamination in students’ drinking water, with the cost including $741,939 to install 818 hydration stations and filters, $750,000 for water coolers until completed installation of the stations in the summer of 2019, $539,880 for environmental remediation costs, $1.2 million for maintenance services, and $282,000 for facilities maintenance—a tab unanimously approved yesterday by the Detroit Community Schools Board, with long-term plan to get drinking water flowing again inside the 106 Detroit schools after faucets were turned off ahead of the school year. The announcement followed Monday’s by Supt. Vitti, when he reported that he and the school board will reveal corporate funders for some $2 million in hydration stations he wants to install across the district.

The need, as the survey revealed, is urgent: among the elevated levels reported by the Detroit Public School District includes a kitchen faucet inside Mason Elementary-Middle School which had more than 54 times the amount of lead permitted the Safe Drinking Water Act; a drinking fountain inside Mark Twain School for Scholars was tested at more than 53 times the federal threshold; a drinking fountain on the first floor near the kitchen of Bethune Elementary-Middle School that had copper levels at nearly 30 times the permissible level—even as DPS officials still await the test results of 17 more buildings. Nevertheless, from the results so far, there is a failing grade: more than half of the 106 schools inside Michigan’s largest school district have contaminated water. Indeed, with EPA recommending lead limits of 15 micrograms per liter or 15 part per billion, water samples at Mason found extreme elevations of lead at Mason, Twain, Davis Aerospace Technical, and Bagley, and extreme levels of copper at Bethune Academy of the Americas elementary-middle school and Western International. Unsurprisingly, public health and water safety experts report that schools should use a tougher standard for lead levels, and nationally recognized Virginia Tech water expert Marc Edwards said: “Those are not good. There is no doubt there are worrisome lead levels: Whenever you take hundreds of thousands of samples in a school, you are going to get some results that are shockingly high.” At a Board of Education meeting last month, Superintendent Vitti said the most practical, long-term, and safest solution for water quality problems inside the schools would be to provide water hydration stations in every building—systems currently used in public school districts, including in Flint, Royal Oak, and Birmingham, as well as Baltimore: these stations, in addition to cooling water, more importantly remove copper, lead, and other contaminants.

Drinking water screening reports demonstrate that water was collected at some schools in April and others in August, with school district officials reporting sampling began in the district in the spring and continued through last August. In September, Superintendent Vitti said that DPS, through its environmental consulting firm, ATC Group, is following EPA protocol for collecting water samples, adding: “If testing occurred at a school after the regular school year, then it was done during summer school, where nearly 80 of our schools were offering classes,” adding that many of the schools with high levels had already identified for concern two years ago—and that those were the first group of schools to move to water coolers. Supt. Vitti initiated water testing of the 106 school buildings in May and August after initial tests results found that 16 schools showed high levels of copper and/or lead. Another eight tested for elevated levels in the spring after they were identified with concerns in 2016. Last month, the DPS District received more test results, which found an 33 additional schools with elevated contaminant levels, bringing the total number of schools with tainted water to 57 in a District already overwhelmed by some $500 million in building repair needs; moreover, the bad gnus could worsen: the total number of schools with high levels could increase as school officials await more test results on another 17 schools.

Dr. Mona Hanna-Attisha, noted for her expertise in Flint, who is a pediatrician and public health expert, concurred that Detroit’s policymakers need to set a much more aggressive limit on allowable amounts of lead in schools. In addition, Michigan Department of Environmental Quality’s school sampling guidance recommends that schools address fixtures which measure above 5 micrograms per liter, the same EPA standard as bottled water, according to Dr. Hanna-Attisha; the American Academy of Pediatrics recommends an action level of just 1 microgram per liter for drinking water in child care facilities and schools. Thus, as Dr. Hanna-Attisha warns: “This should be the District’s action level,” in a letter she co-authored with Elin Betanzo, founder of Safe Water Engineering, a consulting firm—a letter with which Superintendent Vitti said he agrees.

Dr. Hanna-Attisha, who witnessed lead levels in some Flint homes reach 22,000 micrograms per liter, said U.S. EPA school sampling guidance encourages schools to sample every drinking water tap a single time unless lead is detected at greater than 20 micrograms per liter, noting: “One low single tap sample is not sufficient to clear a tap as a potential source of lead, because lead release is sporadic.” Her words come with the benefit of her experience and practice as an associate Professor of Pediatrics at the Michigan State University College of Human Medicine, as well as Director of the MSU-Hurley Children’s Hospital Pediatric Public Health Initiative. She adds: “It is not appropriate to use a single low sample that was taken as a follow-up to a high sample to conclude that a drinking tap is ‘safe to drink,’ although this is how many schools have interpreted sampling data.” Dr. Joneigh Khaldun, the Director and Health Officer for the Detroit Health Department, said she recommends parents of children 6 and younger be tested for blood lead levels, because of the Motor City’s history of elevated levels for children, which has been primarily due to lead paint in homes, adding that the elevated rates in the tests were concerning: “I think, broadly speaking, I support Dr. Vitti in testing every water source in every school…For any school that comes back with elevated lead levels, the actual reasons for that school is not clear. It can be the infrastructure or the drinking fountain. Providing bottled water and other sources is the right thing to do.”

According to Michigan health officials, children are at higher risk of harm from lead, because their developing brains and nervous systems are more sensitive. Lead can cause health problems for children, including learning problems, behavior problems including hyperactivity, a lower IQ, slowed growth and development and hearing and speech problems. That risk is not just physical, but also fiscal: A key part of Detroit’s chapter 9 plan of debt adjustment approved by the U.S. Judge Steven Rhodes was its focus on the importance of provisions to give incentives for families to move back to the Motor City‒a difficult parental choice in the wake of, four years ago, the Detroit News investigation which reported that nearly 500 Detroit children had died in homicides since 2000.

Notwithstanding the terrible health tragedy in Flint, Michigan has no rules mandating the state’s school districts to test for lead in their water supply, according to the Michigan Department of Environmental Quality. According to the GAO, at least eight states require schools to test for lead, and many others assist with voluntary testing. Dr. Khaldun said she supports creating a state law to mandate testing of water sources inside schools—a proposal which would entail substantial costs, creating the query: who will pay—and how?

According to Tiffany Brown, a spokesperson for the Michigan Department of Environmental Quality, the Department supports any schools which wish to test, and the Department can offer technical assistance and general information on sampling, result interpretation, and recommended remedial actions in the event of elevated lead and/or copper results, adding that there are fiscal resources “available through the Michigan Department of Education,” and that the Michigan Department of Environmental Quality is providing information and guidance on best management practices for drinking water in schools to protect the health of students and staff.” In the meantime, the Detroit Public School District is spending $200,000 on bottled water and water coolers for the next several months, with the cost to have stations in every school, one for every 100 students, projected to be $2 million, with Dr. Vitti noting the goal is to deliver clean water, not replace the pipes, or as he put it: “We are not looking to replace the plumbing. The stations address the issue of older plumbing along with weekly flushing.”  

Unequal Treatment? The Financial Oversight and Management Board in Puerto Rico reports that over reliance on outside consultants with conflicts of interest and the failure to invest in a competent workforce have imposed huge costs on and severely weakened the Puerto Rico Electric Power Authority (PREPA) and other Puerto Rico government agencies, with the report including an entire chapter just on interest rate swap agreements, a complicated and high risk investment which, it estimates, has cost Puerto Rican government entities nearly $1.1 billion when they repeatedly bet the wrong way on interest rate movements—meaning that, instead of these investments reducing Puerto Rico’s debt, government entities, including PREPA, had to take on more debt to pay for the losses. It appears that the swaps, a novel means of transactions to Puerto Rico’s Government Development Bank (GDB), where officials made these interest rate bets, or, as the report found, many of the GDB Board members who were required to approve the swap transactions, “were not familiar with the mechanics and risks associated with swaps. Many told us outright they could not describe how a swap worked. Instead, the GDB Board members told us they relied on the advice presented to them by the swap advisor.” That appears to denote that the GDB board members effectively ceded control over their investments in these very risky financial instruments to a third-party swap advisor—an advisor  that earned, and will garner fees for as long as the government of Puerto Rico continued to invest in the swaps, regardless of the outcome—an outcome in this case which entailed enormous losses. Moreover, the report demonstrated that, more generally, as the financial condition of Puerto Rico deteriorated, the deals became more complex and less transparent. An example of the utility PREPA’s overreliance on an outside restructuring advisor, AlixPartners, to lead PREPA’s debt restructuring negotiations with its municipal bondholders, as well as developing PREPA’s business plan and savings initiatives, revealed that PREPA paid Alix Partners $45 million in fees for a debt restructuring deal which was ultimately rejected by the PROMESA Oversight Board, which found the proposed financial agreement called for PREPA to pay more debt than the economy of Puerto Rico could support, and as the Puerto Rico Energy Commission found that the review lacked appropriate due diligence over the ongoing fees for legal counsel, financial advisors, and underwriters that would have accrued had the PREPA restructuring deal moved forward: the Commission specifically noted that the restructuring team charged with ensuring the reasonableness of advisor fees “includes the very advisors whose fees are in question…that is not the arm’s-length relationship necessary to protect consumers from excess fees.”

Investment in Good Governance. For elected state and local leaders, over reliance on consultants can go hand-in-hand with a failure to invest in the technical capacity and expertise of government staff. As noted by a Kobre & Kim report prepared on the evolving fiscal situation in Puerto Rico, PREPA has suffered over the years from a high degree of political interference, including the appointment of hundreds of political appointees to managerial and technical positions without regard for qualifications—appointments which appear to have not only cost considerably from a fiscal perspective, but also weakened the managerial competence of the agency. However, instead of recognizing this reality and implementing labor reforms designed to sharply curtail the influence of political appointees within the agency, the PROMESA Board has instead sought an across-the-board salary freeze and benefit cuts, even as the Board recognizes that PREPA has lost 30% of its workforce since 2012 and has severe shortages of skilled workers in key areas—and that it has developed no plan for workforce training and development, effectively seeming to force PREPA to continue to depend on consultants, rather than build its own expertise.

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The End of State Usurpation of Local Elected Authority? Uneasy shelter from the Fiscal and Physical Storms?

August 31, 2018

Good Morning! In this morning’s eBlog, we consider the end of the State of Michigan to usurp local authority via the appointment of an Emergency Manager, the safety of school drinking water has become an issue in Detroit—especially after Flint, and we consider the extraordinary revisions in the projected Hurricane Maria death toll in Puerto Rica—and the White House response.

Protecting a City’s Children. Detroit Public School Superintendent Nikolai P. Vitti has directed turning off drinking water across the district’s 106 schools  in the wake of after discovering higher-than-acceptable levels of copper and lead in some facilities, with Superintendent Vitti noting his decision came out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools.” he said in a statement. Test results found elevated levels of lead or copper in 16 out of 24 schools which were recently tested. Supt. Vitti stated: “Although we have no evidence that there are elevated levels of copper or lead in our other schools where we are awaiting test results, out of an abundance of caution and concern for the safety of our students and employees.” His actions, no doubt affected by fiscal and water contamination in Flint, came even as Detroit officials and the Great Lakes Water Authority sought to assure residents that water provided by the authority is safe to drink: they pointed to the city’s aging infrastructure as the problem.  Superintendent Vitti said he will be creating a task force to determine the cause of the elevated levels and solutions, noting he had initiated water testing of all 106 school buildings last spring to ensure the safety of students and employees. Water at 18 schools had been previously shut off. He added: “This was not required by federal, state, or city law or mandate: This testing, unlike previous testing, evaluated all water sources from sinks to drinking fountains.” The District does not plan to test students: a spokesperson for the school system noted: “Dr. Vitti said…he has no evidence at all that children have been impacted from a health standpoint.”

Fiscal & Physical Challenges: Earlier this summer, Supt. Vitti released details from a facilities review which had determined the school district would need to spend $500 million now to fix the deteriorating conditions of its schools—an effort for the system projected to cost as much as $1.4 billion if there is a failure to act swiftly, with the Administrator pointing to the failure by former state-appointed emergency managers to make the right investments in facilities while the system was preempted of authority and state-appointed emergency managers from 2009 to 2016 failed to make the right investments, sending what Dr. Vitti described as “the message to students, parents and employees that we really don’t care about public education in Detroit, that we allow for second-class citizenry in Detroit.” The remarks raised anew questions with regard to Michigan’s governance by means of gubernatorially chosen Emergency Managers.  

Superindent Vitti said he had notified Mayor Mike Duggan of his decision to shut off the drinking water, and a spokesperson, John Roach, noted: Mayor is “fully supportive” of the approach Supt. Vitti has taken, adding: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD (Detroit Water and Sewerage Department) has offered to partner with the district on any follow-up testing that needs to be done.” At the same time, the Great Lakes Water Authority issued a statement in an effort to assure “residents and customers of GLWA’s regional system that they are not affected by the lead and copper issues,” noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water,” adding water treated by the authority meets and surpasses all federal and state regulations, albeit adding: “A task force will be formed consisting of engineering and water quality experts” to will help the district “understand the cause and identify solutions.” (Initial results this past week showed elevated levels of copper, lead or both at one or more water sources in 16 of 24 school buildings, according to the statement. Water bottles will be provided at the schools until water coolers arrive. The district also found water-quality issues in some schools in 2016.)

The incident in Detroit raises a host of fiscal and governance issues—especially in the wake of the tragedy in upstate Flint—with, in both cases, the state’s history of appointing Emergency Managers to preempt the authority of local elected leaders. In the case of DPS, Dr. Vitti has contacted the Mayor, the Governor, and a task force of engineers and water experts to understand the cause and possible solutions; Superintendent Nikolai P. Vitti opted to close the water taps out of caution “until a deeper and broader analysis can be conducted to determine the long-term solutions for all schools,” with the decision coming just days before the school district’s 106 schools are scheduled to open next Tuesday. (Water bottles will be provided at the schools until water coolers arrive.) Water officials have blamed aging infrastructure as the cause of the public safety threat. Now Dr. Vitti has asked Mike Duggan and Gov. Rick Snyder to convene a task force of engineers and water experts to determine the cause of the elevated lead and copper levels, and to propose solutions. 

Importantly, it seems the public safety risk is limited to Detroit’s public schools: water officials released a statement Wednesday assuring residents and customers of the Great Lakes Water Authority and the Detroit Water and Sewerage Department that they are not affected by the lead and copper issues at the school district, noting: “Aging school infrastructure (i.e. plumbing) is the reason for the precautionary measure of providing bottled water…The water at GLWA’s treatment plants is tested hourly, and DWSD has no lead service lines connected to any DPSCD building. The drinking water is of unquestionable quality.”

Nevertheless, the threat to public safety—combined with the heartbreaking, long-term threats to Flint’s children from that city’s public water contamination—could add further challenges to Detroit’s recovery from the nation’s largest-ever chapter 9 municipal bankruptcy: a critical part of the city’s plan of debt adjustment was to address its vast amassment of abandoned houses by enticing young families with children to move from the suburbs back into the city—an effort which had to rely on a perception of the quality and safety of its public schools. Now, for a system itself recovering from bankruptcy, DPS faces a bill of at least $500 million to repair its buildings: approximately 25% of the system’s school buildings are in unsatisfactory condition and another 20%are in poor condition, according to the report. The district noted nearly $223 million of high-priority repairs involving elevators and lifts, energy supply, heating and cooling systems, sprinklers, standpipes, electrical service and distribution, lighting, wiring, communications, security system, local area networking, public address and intercoms, emergency lights and plumbing fixtures.

Mayor Duggan’s office and the Detroit Health Department Wednesday issued a joint statement supporting “the approach Dr. Vitti has taken to test all water sources within DPS schools and to provide bottled water until the district can implement a plan to ensure that all water is safe for use,” noting: “We will be supporting Dr. Vitti in an advisory capacity through the health department and the DWSD has offered to partner with the district on any follow-up testing that needs to be done. We also will be reaching out to our charter operators in the coming days to work with them on a possible similar testing strategy to the voluntary one Dr. Vitti has implemented.”

Restoring Municipal Authority. Mayhap it is ironic that Michigan’s relatively rare authority for the Governor to appoint an emergency manager to preempt local elected authority reflects the uneven results of the program—a program I well remember from meeting with Kevyn Orr, whom Gov. Rick Snyder had appointed as Emergency Manager  (EM) to preempt all governing authority of Detroit’s Mayor and Council, at the Governor’s office in Detroit on the first day the city entered the largest municipal bankruptcy in U.S. history—and after the grievous failure of a previous gubernatorially-appointed Emergency Manager to help the Motor City. The very concept of state authority to appoint a quasi dictator and to preempt any authority of local leaders elected by the citizens, after all, feels un-American.

Yet, from that very first moment, Mr. Orr had acted to ensure there was no disruption in 9-1-1 responses—and that every traffic and street light worked. Unlike the experience under an Emergency Manager in Flint, Mr. Orr was intently focused on getting Detroit back on its fiscal and physical feet—and restoring elected leadership to today’s grieving city.

Now, as of this week, Michigan no longer has any local government under a state appointed emergency manager—and observers are under the impression the state program to preempt local authority may be quietly laid to rest. It has, after all, been a program of preemption of local democracy with untoward results: while it proved invaluable in Detroit, it has proven fiscally and physically grievous in Flint, where it has been blamed for contributing to Flint’s water contamination crisis. Indeed, two of Flint’s former EMs have been criminally charged in connection with the crisis. Their failures—at a cost of human lives, appears to have put the future of state pre-emption of local governing authority—may well make state officials leery of stepping in to usurp control a local government, even as some municipal market participants and others see state oversight programs as a positive credit feature. The last municipality in Michigan to be put under a state-imposed emergency manager was Lincoln Park—an imposition which ended three years ago. Michigan Treasury spokesperson Ron Leix noted: “Each situation that led to the financial emergency is unique, so I can’t give a broad-brush assessment about how the law will be used in the future…For the first time in 18 years, no Michigan municipality or school district is under state financial oversight through an emergency manager. This is really about the hard work our local units of government have achieved to identify problems and bring together the resources needed to problem-solve challenging financial conditions.”

In Michigan, the emergency manager program was authorized twenty-eight years ago, granting the governor authority to appoint a manager with extensive powers over a troubled municipality or school district. By 2012, Michigan voters repealed the emergency manager program in a referendum; notwithstanding, one month later Gov. Snyder and legislators re-adopted a similar intervention program—under which local governments could opt among three new options in addition to the appointment of an emergency manager who reports directly to the Governor: chapter 9 municipal bankruptcy, mediation, or a consent agreement between the state and the city to permit local elected officials to balance their budget on their own. (In Michigan, municipalities which exit emergency management remain under the oversight of a receivership transition advisory board while executive powers are slowly restored to elected mayors and city councils.)

The state intervention/takeover program had mixed success, according to Michigan State University economist Eric Scorsone, who noted: “In some cases it’s worked well, like Allen Park where the situation was pretty clear-cut and the solution was pretty clear as to what needed to be done.” (Allen Park regained full local control of its operations and finances in February of 2017 after nearly four years of state oversight. Last June, S&P Global Ratings upgraded the city to investment-grade BBB-plus from junk-level BB, crediting strong budgetary performance and financial flexibility more than 12 months after exiting state oversight. But the appointment, in Flint, of emergency managers demonstrated the obverse: the small city had four emergency managers: Ed Kurtz, Mike Brown, Darnell Earley, and Gerald Ambrose—where the latter two today are confronted by charges of criminal wrongdoing stemming from the lead contamination crisis and ensuing Legionnaire’s disease outbreak that claimed 12 lives. It was the gubernatorially appointed Mr. Earley who oversaw the decision to change Flint’s water source to the Flint River in April 2014 as the city awaited completion of a new pipeline—a decision with fatal human and fiscal consequences. Indeed, two years ago, Gov. Snyder named a task force to investigate the Flint crisis and review the Emergency Manager law—a review which recommended the Governor consider alternatives to the current approach that would engage local elected officials. (No action has been taken to change the law.)

Because only a minority of states have authorized chapter 9 municipal bankruptcy, there is no uniform state role with regard to city or county severe fiscal distress and bankruptcy. Jane Ridley, senior director in the U.S. public finance government group at S&P Global Ratings and sector lead for local governments, has noted that state oversight is considered as part of the rating agency’s local GO criteria: “We do think that having a state that has oversight, especially if it’s a proven mechanism, can be very helpful for struggling entities…If they ended oversight entirely it would likely have an impact on the institutional framework scores and their sub scores.” A Moody’s analyst, Andrew Van Dyck Dobos, noted: “While an EM is in most cases is a last option, the ability for it to implement some policies and procedures is going to be typically viewed, at least at the onset, as a credit positive.”

Ending Shelter from the Storm. U.S. District Judge Timothy Hillman yesterday ruled that temporary housing given to hundreds of Puerto Ricans displaced by Hurricane Maria will end next month, meaning Puerto Ricans will be forced to check out of temporary housing provided by Federal Emergency Management Agency (FEMA) as part of the agency’s Transitional Sheltering Assistance (TSA) program. Judge Hillman, in his decision, wrote: I strongly recommend the parties get together to find temporary housing, or other assistance to the Plaintiffs and other members of the class prior to that date,” with his decision coming the same week Puerto Rico updated its official death toll from Maria to 2,975, a vast increase from the original count of 64. Judge Hillman’s decision also comes about two months after a national civil-rights group filed a lawsuit which had sought a restraining order to block FEMA from ending the program. The group, LatinoJustice, argued in the suit that it would lead to families’ evictions. It also came as, two days ago, President Trump met with reporters to respond to questions with regard to the mounting death toll—a session in which the President told the reporters: “I think we did a fantastic job in Puerto Rico.” Some 1,744 Puerto Rican adults and children were in the FEMA program when the lawsuit was filed. U.S. District Judge Leo T. Sorokin temporarily extended the program to the end of last July, and subsequently extended it until today—and then, once more, to September 14th.

Now, the White House is responding to a new estimate which increases the number by about 33% more to 2,975 after an independent study. White House spokeswoman Sarah Huckabee Sanders claimed in a statement that the back-to-back hurricanes which hit last year prompted “the largest domestic disaster response mission in history.” She added that President Donald Trump “remains proud of all of the work the Federal family undertook to help our fellow citizens in Puerto Rico.” She also says the federal government “will continue to be supportive” of Gov. Ricardo Rossello’s accountability efforts and says “the American people, including those grieving the loss of a loved one, deserve no less.” The new estimate of 2,975 dead in the six months after Maria devastated the island in September 2017 was made by researchers with the Milken Institute School of Public Health at George Washington University. It was released Tuesday.

The Human Costs of Misgovernance

August 7, 2018

Good Morning! In this morning’s eBlog, we consider the awful physical, fiscal, and human challenges of municipal governance.

Human Costs of Misgovernance. In the ongoing trial in the Flint water case, Genesee District Judge William Crawford yesterday heard oral arguments in the case of Dr. Eden Wells, the state’s chief medical executive. Judge Crawford said he will make his decision only after all transcripts are completed and after attorneys are given seven days to file additional briefs with the court, meaning that Dr. Wells will likely have to wait several weeks before she learns whether or not she will have to stand trial on charges, including involuntary manslaughter, related to the Flint drinking water crisis—a trial where she faces charges of manslaughter, related to the Flint water crisis. Yesterday, Special prosecutor Todd Flood told Judge Crawford that Dr. Wells had a duty under Michigan state law to warn the public of Legionnaires’ outbreaks in the area during the 17 months that the City of Flint used the Flint River as its source of water—a source turned to under the direction of a state-appointed emergency manager, rather than the city’s elected leaders. The trial proceeded in the wake of the dismissal of Michigan Gov. Rick Snyder from the suit after, last Wednesday, U.S. District Judge Judith Levy had ruled that the suit filed on behalf of residents and businesses did not claim that Gov. Rick Snyder was aware of risks when the city switched to Flint River water in 2014—unlike other defendants who testified they knew and disregarded the hazards involved. The pending case is over claims filed on behalf of 12 Flint residents and three businesses: it names twenty-seven defendants, including state and local agencies and officials. The plaintiffs are asking the Court to establish a Flint Victims Compensation Fund, providing the affected Flint residents with medical and financial assistance. Should the state lose, such a decision could pose a financial burden for the recently upgraded state’s credit rating. Moreover, such a decision could have adverse implications for Michigan’s Emergency Manager law for distressed local governments.

Special Prosecutor Todd Flood testified: “The defendant neglected or refused to perform that duty. She knew about it…it was reasonably foreseeable that someone was going to get sick‒that someone was going to get harmed,” arguing that state officials, four of whom face criminal charges related to the Flint water contamination, and Dr. Wells, in particular, was required by her official position to halt the flow of the contaminated water she knew could create a threat.  

The arguments deemed Dr. Wells a hero during the water emergency, in no small part because of her giving credence to the work of Dr. Mona Hanna-Attisha, the Hurley Medical Center pediatrician who had studied the blood levels of Flint’s children—and concluded that the percentage of elevated blood levels doubled in the wake of the state decision to change the source of the city’s drinking water. Dr. Wells, Michigan Department of Health and Human Services Director Nick Lyon, and Gov. Snyder ultimately provided public notice of the outbreaks of Legionnaire’s disease in the city related to the Flint water contamination; however, that notice was not given until January of 2016—long after the fatal damage to human health had occurred—and months after the city’s reliance on the contaminated water source had ceased—reliance which resulted in at least 10 deaths—or, as we previously noted, U.S. Judge Judith Levy’s opinion finding that “some government officials disregarded the risk the water posed, denied the increasingly clear threat the public faced, protected themselves with bottled water, and rejected solutions that would have ended the crisis sooner.  

The human health and safety crisis arose from a governing issue: the State of Michigan’s reliance on substituting state appointed emergency managers over municipal elected leaders. Thus, Gov. Ric Snyder, named Darnell Earley as Flint’s emergency manager—displacing the city’s Mayor and City Council—in September of 2013—at a time, according to some to the document before the court in which the plaintiffs allege the defendants knew, prior to the fatal drinking water switch, that the Flint River had been was professionally evaluated and rejected as a drinking water source, with the decision to source water from the Flint River made on April 25, 2014, after the city’s contract with Detroit to receive Lake Huron water ended and the city was awaiting the completion of the new Karegnondi water pipeline—a $285 million pipeline to provide Lake Huron water to Flint and Genesee County. Flint has since entered into a long-term primary water agreement with the Great Lakes Water Authority. (Two and a half years ago, Mr. Earley was one of fourteen officials named as defendants in a class action lawsuit brought in federal court by Flint residents, a complaint alleging that “Defendant’s conduct in exposing Flint’s residents to toxic water was so egregious and so outrageous that it shocks the conscience,” and that: “For more than 18 months, state and local government officials ignored irrefutable evidence that the water pumped from the Flint River exposed (users) to extreme toxicity.” The suit also named Michigan Gov. Rick Snyder, former Flint Mayor Dayne Walling, and former Flint Emergency Manager Jerry Ambrose.

Restoring Power–and Recovering Governing Authority

July 10, 2018

Good Morning! In this morning’s eBlog, we consider the challenges of restoration of electric power (as opposed to political power) in Puerto Rico, and then try to explore the risks of powers of appointments of emergency managers by a state—here as the City of Flint, Michigan is still seeking to fiscally and physically recover from the human and fiscal devastation caused by the State of Michigan.

Adios. Walter Higgins, the CEO Puerto Rico’s bankrupt PREPA Electric power authority resigned yesterday, just months after he was chosen to oversee its privatization, an appointment made in an effort to fully restore power some ten months after the human, fiscal, and physical devastation wrought by Hurricane Maria. Now his resignation adds to PREPA’s uphill climb to not only fully restore power, but also to address its $9 billion in debt. Gov. Ricardo Rosselló said in a statement that Mr. Higgins had resigned for personal reasons, while Mr. Higgins, in his resignation letter, wrote that the compensation details outlined in his contract could not be fulfilled—with his written statement coming just one month after the Commonwealth’s Justice Secretary said it would be illegal for him to receive bonuses. According to a PREPA spokesperson, Mr. Higgins will remain as a member of the PREPA Board. Nevertheless, his appointment was stormy itself, after, last month, Puerto Rican officials had questioned how and why he had been awarded a $315,000 contract without authorization from certain government agencies—in response to which PREPA’s Board advised the government as a consultant, rather than filling the vacancy for an executive sub-director of administration and finance. Unsurprisingly, his departure will not be mourned by many Puerto Ricans in view of his generous compensation package of $450,000 annual salary compared to the average income for Puerto Ricans of $19,518.  

Nevertheless, PREPA officials, announced that current Board member Rafael Diaz Granados will become the new CEO—with nearly double the compensation: he will assume the position on Sunday and receive $750,000 a year—a level which Puerto Rico Senate President Thomas Rivera Schatz described as the “kind of insult that to Puerto Ricans is unacceptable,” as the government and PROMESA Oversight Board continue to struggle to address and restructure Puerto Rico’s $70 billion in public debt. Nevertheless, as PREPA crews continue restoring power to the last 1,000 or so customers who have been without power since Maria hit nearly a year ago and destroyed up to 75% of transmission lines across the territory, the federal government is still operating 175 generators across the island.

Indeed, U.S. House Natural Resources Committee Chair Rob Bishop (R-Utah) has scheduled a hearing for July 25th to assess and inquire about the status of the Electric Power Authority and to examine the functioning and plans for the privatization of PREPA assets, an issue which the territory’s non-voting Congressional Representative Jenniffer Gonzalez noted “has been under the Committee’s jurisdiction for the past two years.” Rep. Gonzalez added: “I’m surprised with the salary: I did not expect that amount. I do not know the elements which affected Mr. Higgin’s resignation, and I believe that these changes affect the process of recovery on the island.”

Meanwhile, Chairman Bishop had announced a second potential hearing—this one to assess the operation of the PROMESA statute and how the PROMESA Oversight Board is working, after, last week, postponing an official trip with a dozen Members of Congress to assess the physical and fiscal recovery on the island, after meeting, early last month in San Juan with the now former PREPA Director Higgins, and after, in the spring, Chair Bishop, Chair Doug LaMalfa (R-Ca.), of the Subcommittee on Island Affairs, and Chairman Bruce Westerman (R-Ark.) had announced a probe into “multiple allegations of corruption and serious allegations of maladministration” during the restoration of the electric service after the storm.

Out Like Flint? Meanwhile, in a criminal and fiscal case arising out of Michigan’s Flint water crisis in the wake of fatal decisions by a gubernatorially appointed Emergency Manager, closing arguments in the involuntary manslaughter case against state Health and Human Services Director Nick Lyon began yesterday before Genesee District Court Judge David Goggins, who will determine whether Director Lyon will go on trial in the Flint water crisis prosecution on charges of involuntary manslaughter and misconduct in office connected to the 2014-2015 Legionnaires’ disease outbreak in the Flint region which killed at least 12 people and sickened another 79 people. A misdemeanor charge of “willful neglect” to protect the health of Genesee County residents was added last week. Director Lyon is receiving assistance in his defense from John Bursch, a former Michigan Solicitor General, who was hired for that position by Michigan Attorney General Bill Schuette—who has brought criminal charges related to the Flint water crisis against Director Lyon and 14 other current and former city and state government employees. Flint still faces financial questions after years of emergency management.

The criminal trial comes as questions still remain with regard to Flint’s long-term financial health, despite six years of state oversight that overhauled the city’s finances, after a 2011 state-ordered preliminary review showed problems with Flint’s finances and ultimately recommended an emergency manager for the city. Last April, State Treasurer Nick Khouri repealed all remaining Emergency Manager orders, with state officials claiming the city’s financial emergency has been addressed to a point where receivership was no longer needed, and, as the Treasurer wrote to Mayor Karen Weaver: “Moreover, it appears that financial conditions have been corrected in a sustainable fashion,” and Flint CFO Hughey Newsome said that while emergency managers had helped Flint get its financial house in order; nevertheless, Flint’s fiscal and physical future remains uncertain: “The after-effects of the water crisis, including the dark cloud of the financials, will be here for some time to come: We’re not out of the woods yet, but I don’t think emergency management can help us moving forward.” In the city’s case, the fateful water crisis with its devastating human and fiscal impacts, hit the city as it was still working to recover from massive job and population losses following years of disinvestment by General Motors. CFO Newsome said the crisis affected the city’s economic development efforts and may have left potential businesses wanting to come to Flint wary because of the water.

Flint’s spending became more in line with its revenues, changes were made to its budgeting procedures, and retiree healthcare costs and pension liabilities were reduced while under emergency management. Nevertheless, past financial overseers have warned the city about what would happen if Flint allows its fiscal responsibilities to slip. Three years ago, former Emergency Manager Jerry Ambrose, in a letter to Gov. Snyder, wrote: “If, however, the new policies, practices and organizational changes are ignored in favor of returning to the historic ways of doing business, it is not likely the city will succeed over the long term: The focus of city leaders will then likely once again return to confronting financial insolvency.”

Today, there are still signs of potential fiscal distress, notwithstanding  the city’s recovery; indeed, Mayor Weaver’s FY2019 budget plans for a more than $276,000 general fund surplus—even as the municipal budget is projected to grow to more than $8 million by FY2023, with that growth attributed by CFO Newsome to ongoing legacy costs and a lack of revenue—or, as he put it: “My last two predecessors have really delivered realistic budgets: I definitely don’t see this administration being irresponsible in that regard, and I don’t see this Council rubberstamping such a budget either.”

And, today, questions about criminal and fiscal accountability are issues for the state’s third branch of government: the judiciary, in District Court Judge William Crawford’s courtroom, where the issues with regard to criminal charges relating to the governmental actions of defendants charged for their actions during the Flint Water Crisis include former Emergency Manager Darnell Early and former City of Flint Public Works Director Howard Croft, and former state-appointed Flint Emergency Manager Jerry Ambrose, who, prosecutors  allege, knew the Flint water treatment plant was not ready to produce clean and safe water, but did nothing to stop it. The trial involves multiple charges, including willful neglect of duty and misconduct in office. (Mr.  Ambrose was the state appointed Emergency Manager from January until April of 2015; he also held the title of Finance Director under former state appointed emergency managers Mike Brown and Darnell Early. To date, four others have entered into a plea agreement in their cases.)

Bequeathing a Legacy of healthcare and retirees benefit costs: When Mr. Ambrose left in 2015 and turned things over the to the Receivership Transition Advisory Board, he stated that Flint’s other OPEB costs had been reduced from $850 million to $240 million, adding that a new hybrid pension plan put in place by state appointed emergency managers had reduced Flint’s long-term liability; however, he warned, on-going legacy costs are still one of the most pressing issues for Flint’s fiscal future: “Remember, the reality we’re facing: we have a $561 million liability to (Municipal Employees’ Retirement System), and the fund is only at $220 million; we also have an obligation to our 1,800 retirees to make sure that we’re paying our MERS obligation.” (A three percent raise for Flint police officers approved earlier this year added to those liabilities, with those increases attributable to two different contracts, which were imposed on officers by former state-appointed Emergency Managers Michael Brown and Darnell Earley in 2012 and 2014, respectively.)

The RTAB asked CFO Huey Newsome in January how the city would pay the additional $264,000 annually in wages and benefits along with a projected $3.4 million in additional retirement costs over the life of the contract—a question he was unable to specify an answer to at the time: “To tell you exactly where those‒where those dollars will come from right at this point in time, I can’t say…I think the ‘so what’ of this is that, you know, the incremental impact from this pay raise is not going to be that large when you think about the three and a half million. The city still needs to figure out where that three and a half million is coming from.” Moreover, he added, because police negotiated the raise, it also could be an issue with other unions wanting a similar increase during their future negotiations, adding that the city is making increased payments to MERS to avoid balloon payments in the future. For example, Mr. Newsome said, Flint will pay an additional $21.5 million this year, adding that all the city’s funds currently have a positive balance. However, Flint’s budget projections show the water fund will have a $2.1 million deficit in FY2018-19, a deficit projected to increase to $3.3 million by FY2022-23; Flint’s fiscal projections eventually put the water fund balance in the red by 2022-23; however, CFO Newsome warned: “The water fund is probably the most tepid one, because it is expected to be below the reserve balance by the end of the year,” noting the city can only account for 60% of the water that goes through its system, adding that the city has an 80% collection rate on its water bills, which is about $28 million this fiscal year, telling the Mayor and Council: “One of our top priorities is better metering.”

The city’s most-recent budget for 2018-19 calls for a combined revenue increase of $1.09 million more than previous budget projections because of increased assessed property values, more income taxes coming in, and additional state revenue sharing. Nevertheless, one Board member, notwithstanding projections for increased revenue, is apprehensive that Flint’s “tax base is likely going to continue to shrink, and the city currently has limited resources to reverse this trend,” or, as CFO Newsome put it: “Right now, revenue is not there: The income tax is relatively flat. The property tax is flat. That’s reality.” The city’s current proposed FY2019 budget calls for an increase of $120,000 from property taxes, $339,000 increase in income tax revenue, and an additional $631,000 in revenue from the state of Michigan. 

 

Municipal Fiscal Distress & State Oversight.

June 18, 2018

Good Morning! In this morning’s eBlog, we consider a new study assessing the potential role of property tax assessments in Detroit’s historic chapter 9 municipal bankruptcy; then we observe, without gambling on the odds, the slow, but steady progress back to self-governance in Atlantic City, and weaning off of state fiscal oversight; before, finally noting the parallel efforts to exit state oversight in Flint, Michigan—where the proximate cause of the city’s fiscal and physical collapse occurred under a quasi-state takeover.

Foreclosing or Creating a City’s Fiscal Recovery? One in 10 Detroit tax foreclosures between 2011 and 2015 were caused by the city’s admittedly inflated property assessments, a study by two Chicago professors has concluded. Over-assessments causing foreclosure were concentrated in the city’s lowest valued homes, those selling for less than $8,000, and resulted in thousands of Detroit homeowners losing their properties, according to the study: “Taxed Out: Illegal property tax assessments and the epidemic of tax foreclosures in Detroit,” which was written by  Bernadette Atuahene and Christopher Berry. Chicago-Kent Law School Professor Atuahene noted: “The very population that most needs the city to get the assessments right, the poorest of the poor, are being most detrimentally affected by the city getting it wrong: “There is a narrative of blaming the poor that focuses on individual responsibility instead of structural injustice. We are trying to change the focus to this structural injustice.” (Professor Atuahene is also a member of the Coalition to End Unconstitutional Tax Foreclosures.) Their study came as the Wayne County Treasurer has foreclosed on about 100,000 Detroit properties for unpaid property taxes for the period from 2011 through 2015, about a quarter of all parcels, as the Motor City suffered the after-effects of population decline, the housing market crash, and the Great Recession.

Professors Atuahene and Berry acknowledged many factors can trigger tax foreclosure, estimating that the number of foreclosures was triggered by over-assessments, in part by calculating the foreclosure rate if all properties were properly assessed. The study also controlled for properties various purchase prices, neighborhoods and sale dates.

Detroit Mayor Mike Duggan has, as we have noted, acknowledged such over assessments; yet he has made clear accuracy has improved with double-digit reductions over the last four years—and completed the first comprehensive such assessment two years ago for the first time in more than half a century. The city’s Deputy Chief Financial Officer, Alvin Horhn, last week stated he had not reviewed the study; however, he noted that “most of their assumptions rely on data that does not meet the standards of the State Tax Commission and would not be applicable under Michigan law,” a position challenged by Professor Atuahene, who had previously stated the data does comply with the law, noting: “We believe the citywide reappraisal has been an important part of the major reduction in the number of foreclosures occurring in the city, which continue a steady decline and will provide a solid foundation for future growth: The number of foreclosures of owner occupied homes, specifically, has gone down by nearly 90% over the past few years.”

The city’s authority to foreclose, something which became a vital tool to address both property tax revenues and crime in the wake of the city’s chapter 9 municipal bankruptcy, was enabled under former Gov. John Engler 29 years ago under a statewide rewrite of Michigan’s property tax code: changes made in an effort to render it faster and easier to return delinquent properties to productive use. On a related issue, the Motor City is currently facing a lawsuit by the American Civil Liberties Union of Michigan—a suit which maintains the city’s poverty tax exemption, which erases property taxes for low-income owners, violated homeowner’s due process rights because of its convoluted application process, arguing that the practice violates the federal Fair Housing Act by disproportionately foreclosing on black homeowners. However, the Michigan Court of Appeals has upheld a ruling by Wayne County Judge Robert Colombo, dismissing Wayne County from the lawsuit, ruling the suit should have been brought in front of the Michigan Tax Tribunal. 

Pole, Pole. In Bush Gbaepo Grebo Konweaken, Liberia, a key Gbaepo expression was “pole, pole” (pronounced poleh, poleh), which roughly translated into ‘slowly, but surely’—or haste makes waste. It might be an apt expression for Atlantic City Mayor Frank Gilliam as the boardwalk city has resumed control back from the state to forge its own fiscal destiny—presumably with less gambling on its fiscal future. In his new $225 million budget, the Mayor has proposed to keep property taxes flat for the second consecutive year, and is continuing, according to the state’s Department of Community Affairs, charged with the municipality’s fiscal oversight and providing transitional assistance, to note that the Mayor and Council President Marty Small’s announcement demonstrated that “an understanding of the issues that Atlantic City faces, and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Under Mayor Frank Gilliam’s proposed $225 million budget, property taxes would remain flat for a second straight year, there would be some budget cuts, as well as savings realized from municipal bond sales to finance pension and healthcare obligations from 2015. The Mayor also was seeking support for capital improvements, additional library funding, and one-time $500 stipends for full-time municipal employees with salaries below $40,000. The ongoing fiscal recovery is also benefitting from state aid: the state Department of Community Affairs reported the state is providing $3.9 million in transitional aid, a drop from the $13 million awarded to the City of Trenton in 2017 and $26.2 million from 2016. Last year Atlantic City adopted a $222 million budget, which lowered taxes for the first time in more than a decade. The Department’s spokesperson, Lisa Ryan, noted: “Yesterday’s announcement by Mayor Gilliam and Council President [Marty] Small demonstrates city officials are showing an understanding of the issues that Atlantic City faces and an emerging ability to find ways to solve them without resorting to property tax increases: This is a solid budget, and the city staff who worked diligently to draft it should be proud of their efforts.”

Gov. Phil Murphy scaled back New Jersey’s intervention efforts in April with the removal of Jeffrey Chiesa’s role as state designee for Atlantic City. Mr. Chiesa, a former U.S. Senator and New Jersey Attorney General, was appointed to the role by former Gov. Chris Christie after the state takeover took effect.

Not in Like Flint. The Flint City Council was unable last week to override Mayor Karen Weaver’s veto of its amendments to her proposed budget: the Council’s counter proposal had included eight amendments to the Mayor’s $56 million proposed budget for 2018-2019—all of which Mayor Weaver vetoed in the wake of CFO Hughey Newsome’s concerns. The situation is similar to Atlantic City’s, in that this was Flint’s first budget to be considered and adopted in the wake of exiting state oversight. Mayor Weaver advised her colleagues: “This is a crucial time for the City of Flint: this is the first budget we are responsible for since regaining control…I am proud of the budget that I submitted, and I have full faith in the City’s Chief Financial Officer. Just as I have the right to veto the budget, the City Council has the right to override that veto. It is my hope that they would strongly consider my reasons for vetoing and that the Council and I can work together to create a budget that can sustain the City for years to come.” Her veto means the budget will be before the Council for a final vote in order to have it in place for the new fiscal year beginning on the first of next month.

Among the Council proposals the Mayor rejected was employee benefits, including a proposed pay raise for the City Clerk of $20,000, the creation of a new deputy clerk position, a new parliamentarian position, and full health benefits for part-time employees. Or, as CFO Newsome noted: “The risk these added costs could pose on the city’s budget is not in the best interest of the city nor the citizens of Flint,”  as he expressed disappointment over the time wasted on arguing over what amounted to $55,000 in the Mayor’s budget, especially when the city was currently tackling bigger fiscal challenges, such as its $271 million unfunded pension liability and keeping the city’s water fund out of red ink, noting: “These are things that we are looking at, and during all of these [budget] proceedings so little attention was paid to that.”

That is to note that while sliding into chapter 9 municipal bankruptcy, or, as in Atlantic City, state oversight, can be easy; the process of extricating one’s city is great: there is added debt. Indeed, Flint remains in a precarious fiscal position, confronted by serious fiscal challenges in the wake of its exit from state financial receivership the month before last. Key among those challenges are: employee retirement funding and the aging, corroded pipes (with a projected price tag of $600 million) which led to the city’s drinking water crisis and state takeover.

On the public pension front, in the wake of state enactment of public pension reforms at the end of 2017 which mandate that municipalities report underfunded retirement benefits, Flint reported a pension system funded at only 37% and zero percent funding of other post-employment retirement benefits, which, according to the state Treasury report, Flint does not prefund.

The proposed budget assumes FY2019 general fund revenues of approximately $55.8 million, of which $4.7 million is expected to come from property taxes. This would be an increase of about $120,000; Flint’s critical water fund will have a $4 million surplus at the end of FY2018; however, CFO Newsome warned the fund will fall into the red within the next five years if it fails to bring in more money.

Exiting from State Receivership

April 9, 2018

Good Morning! In this morning’s eBlog, we return to Flint, Michigan, where, in the wake of last week’s release by Gov. Rick Snyder of the city from receivership and state oversight—the city will have to make its own way to full fiscal and physical recovery from the many years’ of state-imposed choices—but recovery too after the former Michigan Revenue Sharing program has ceased, making the physical and fiscal challenge ever so steep.  

Setting the Path for a Strategic Recovery & a Return to Home Rule. After Gov. Rick Snyder, at the end of last week, announced he was releasing the City of Flint from receivership and state oversight, he has now announced that the State of Michigan will stop providing Flint residents with free bottled water when current supplies run out, citing nearly two years of test results showing falling lead levels in city tap water. Indeed, preliminary data from early this calendar year showed 90 percent of high-risk Flint water sites at or below 4 part per billion of lead, according to the Michigan Department of Environmental Quality. Thus, if these results hold through end of June, it would be the fourth consecutive six-month period levels have tested below the federal action level of 15 parts per billion. In the wake of the Governor’s announcement, the state plans to close four remaining water bottle distribution centers when supplies are exhausted—something that could happen within the next week, albeit water filters and cartridges will remain available at Flint City Hall.

In his announcement, the Governor said: “I have said all along that ensuring the quality of the water in Flint and helping the people and the city move forward were a top priority for me and my team…We have worked diligently to restore the water quality and the scientific data now proves the water system is stable and the need for bottled water has ended.”  The Governor did not discuss the state’s role in unbalancing and aggravating Flint’s fiscal misery—one to which the State contributed both through its former imposition of Emergency managers to preempt the city’s elected leaders—and through its elimination of state revenue sharing. By 2014, Flint had lost $54.9 million dollars in state aid—funds which would have been sufficient then to have fully paid off its annual deficit, as well as all $30 million of its municipal bond indebtedness, and still have had over $5 million in surplus

One of the hard questions now will be with regard to the potential impact of assessed property values and tax revenues in a city where those values were so harshly impacted by the fear of poisoned water: property tax assessments are mailed out every March: In 2016, those revenues, $19.7 million, made up about 23% of the city’s $81 million in general revenue. Unsurprisingly, that led to appeals to the Michigan Tax Tribunal for a poverty exemption to property taxes, with residents citing the costs associated with the water problems as one reason. Those lower assessed values added to the challenge to Genesee County to sell tax-foreclosed properties.

Mayor Karen Weaver, who has played a key role in the efforts to replace underground lead service lines at homes across the city, wrote to the Gov. last Friday to advise him that residents had “great anxiety” over the prospect of closing water distribution sites., noting: “As I have stated before and will continue to say, this is not what I want for our city, and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

In response, Gov. Snyder replied that Michigan taxpayers were not legally obligated to fund bottled water or Flint distribution sites after last September; however, “in the spirit of good faith and our continued partnership, the state has continued to provide funding for hundreds of thousands of cases of bottled water for the daily use of residents.” Noting that he had provided the Mayor with Weaver recent water testing data and methodology, he added: “Since Flint’s water system has been and continues to be well within the standards set by the federal government, we will now focus even more of our efforts on continuing with the health, education and economic development assistance needed to help move Flint forward,” adding: “I remain steadfast in that commitment.

Nevertheless, with lead service line replacement set to resume this spring, there remain not just physical and fiscal fears, but also lingering apprehensions that underground work could dislodge lead flakes from existing pipes and again contaminate home tap water. That is, parents are scared—hardly a message which would enhance assessed property values.

Thus, it might seem ironic that Gov. Snyder’s decision to end bottled water service came two days after his administration had, last Wednesday, announced it was releasing Flint from receivership—a receivership under which the fateful, devastating decision to begin drawing drinking water from the Flint River until construction of the new regional Karegnondi Water Authority pipeline to Lake Huron was completed. (The City of Flint has been getting its treated water from the Great Lakes Water Authority since October of 2015. Last November, Flint inked a 30-year agreement to stay on the Detroit area system in November 2017 in the wake of a federal court order mandating the City Council to quit delaying a decision about its permanent water source.)

A Silver Lining? Flint lead levels have dropped below 4 parts per billion so far this year, according to the Michigan environmental department; for the second half of 2017, 90 percent of high-risk sites had tested below 6 ppb. Officials also said the state has conducted “extensive flushing and testing” of unfiltered water at schools, day cares and senior homes in Flint—meaning the updated test results are finding lower levels than the statewide 10 parts per billion which Gov. Snyder would like to enforce statewide. Keith Creagh, Director of the Michigan Department of Natural Resources, noted: “Flint’s water is undoubtedly one of the most monitored systems in the country, and for the last 22 months several types of extensive testing data points have consistently supported that Flint’s water system has stabilized.”

Nevertheless, the action to stop providing bottled water to the beleaguered city led Michigan Senate Minority Leader Jim Ananich (D-Flint) to state: “It’s beyond belief that the Governor expects the folks in Flint to trust the government now, when they lied to our faces about lead in our water just a few years ago…That trust was broken, and families in Flint still don’t feel that the water in their homes is safe to drink.” Similarly, Rep. Sheldon Neeley (D-Flint) stated he was requesting the Governor to continue providing bottled water until the state has successfully addressed the “crisis of confidence” among Flint residents, noting: “From the perspective of Flint residents, it was the same data, personnel and science that failed them. They don’t trust them still.” Rep Neeley added that if the State fails to continue providing services to Flint residents, he would support any legal action the city may take “to compel the state to do its job and continue water service to its citizens.” (The State of Michigan has sent more than $350 million in state funds to Flint since late 2015, in addition to $100 million from the federal government, that has paid for bottled water, water system upgrades, and local health initiatives—with a portion of the funding mandated under a four-year, $97 million settlement reached last year between the state and a coalition which had sued in an attempt to secure safe drinking water. Under the agreement, the state agreed to spend an additional $47 million on top of already budgeted funds to replace lead pipes and provide free bottled water.) Now, an Environmental Department spokeswoman reports she expects the state’s current supply of bottled water will run out within four to seven days.

Mayor Karen Weaver, whose administration is working to replace underground lead service lines at homes across the city, published a letter to Gov. Snyder earlier Friday telling him residents had “great anxiety” over the prospect of closing water distribution sites: “As I have stated before and will continue to say, this is not what I want for our city and I stand by my position that free bottled water should be provided to the people of Flint until the last known lead-tainted pipe has been replaced…We know that the water in Flint is much better than when I made the Emergency Declaration in December 2015, and that is a good thing. However, we also know that trust has to be restored before residents are ready to rely only on filtered residents.”

The Fiscal & Legal Challenges of Smaller Municipalities

eBlog

March 28, 2018

Good Morning! In this morning’s eBlog, we consider the ongoing fiscal, physical, intergovernmental, and legal challenges to Flint, Michigan—as too many parties seek to plead innocent to state actions, which have wreaked such devastating fiscal and physical costs. Then we head east to one of the nation’s oldest municipalities, Bristol, Virginia, which appears to be on the precipice of chapter 9 municipal bankruptcy.

Fiscal Fraud & Unfiscal Federalism? Andy Arena, the FBI Detroit office’s former director, and lead investigator into the City of Flint’s water crisis, this week testified before the Michigan Senate Appropriations Subcommittee on General Government that he has launched a new probe amid allegations of “financial fraud” and “greed” as critical factor behind the fateful decision years ago to switch the city’s water source, stating: “Without getting too far into depth, we believe there was a significant financial fraud that drove this,” adding that the alleged scheme benefited “individuals.” Or, as he testified: “I believe greed drove this.”

His testimony came as Michigan Attorney General Bill Schuette continued the investigation he started in the wake of Gov. Rick Snyder’s declaration, two years ago, of a state of emergency in the wake of the severe and life threatening lead water contamination, as the criminal probe, which has already led to charges against 15 local and state officials—charges resulting in four plea deals and preliminary exams involving six defendants, including state Health and Human Services Director Nick Lyon and Chief Medical Executive Eden Wells continue. Now, the investigation is focusing on the potential motivation behind the decision to switch the City of Flint from the Detroit area water system to the new Karegnondi Water Authority—a decision which, when Flint opted to join the regional authority, had terminated its arrangement with the Detroit water system and opened the fateful portals to drawing water from the Flint River as an interim source, e.g. the dreadful step which resulted in contaminated drinking water and calamitous drops in assessed property values—not to mention grave governing questions with regard to the culpability of state appointed emergency managers preempting local elected leaders. (Within 17 months, the decision, made while the city was run by state-appointed emergency managers, was reversed after outbreaks of Legionnaires’ and increased levels of bacteria, total trihalomethanes and lead were found in water. Five years ago, in March, Flint’s City Council members voted 7-1 to join a new regional provider, rather than remain a customer with the Detroit system—as it had for decades. Three days earlier, Flint Emergency Manager Ed Kurtz had approved the agreement, notwithstanding then-State Treasurer Andy Dillon’s skepticism with regard to whether the new regional authority made financial sense.).

Last week, when Sen. Mike Nofs (R-Battle Creek) asked whether the probe involved local, state, and federal entities, Mr. Arena responded: “It kind of cuts across all lines right now…I don’t know that they were working so much in concert, but the end game was people were trying to make money in different ways.” He reiterated that his FBI team has been heading the Flint criminal investigation for more than two years; however, he testified he was uncertain when it might end, adding: “We’re moving at lightning speed…I can assure everyone here that we are working as quickly as we possibly can: Our bottom line is we want justice for the people of Flint, and we have to do that methodically.” Unsurprisingly, he did not detail what “justice” might mean: would it mean reparations for the fiscally and physically devastated city and its taxpayers?

The case, as we have previously written, commenced after the Governor, five years’ ago, preempted all municipal authority via the appointment of Ed Kurtz as the city’s Emergency Manager, effectively preempting any municipal authority for the brewing fiscal, physical, and health catastrophe; Mr. Kurtz, in this preemptive capacity then signed off on the fateful order in June of 2013 to allow the “upgrading of the Flint Water Plant to ready it to treat water from the Flint River to serve as the primary drinking water source for approximately two years and then converting to KWA delivered lake water,” a source which the city used from April of 2014 until October 2015, when the city was reverted to the Detroit system in the wake of an outbreak of Legionnaires’ cases and evidence of elevated levels of lead in the city’s children—a most ill omen, as it signaled to parents the prohibitive cost of health and safety to continue to reside in the city—and the unlikelihood of any ability to sell their homes at any kind of a reasonable price. Mayhap worse, last October, a federal judge dismissed objections by Flint’s City Council and paved the way for Flint officials to move forward with a long-term contract with the Detroit area Great Lakes Water Authority—a position supported by Mayor Karen Weaver as vital to avert chapter 9 municipal bankruptcy. Thus, Mayor Weaver, Gov. Snyder, and the EPA supported a proposed 30-year agreement with the Great Lakes Water Authority—a position on which the Flint City Council did not agree—leading to a successful suit by the Michigan Department of Environmental Quality to compel approval of the agreement.

Concurrently, in a related trial on these physical and fiscal event, before a Genesee District Court Judge in a trial where the state’s Chief Medical Officer has been charged with crimes related to the Flint water crisis, a researcher, Virginia Tech Professor Marc Edwards, testified before Genesee District Court Judge William Crawford yesterday that Dr. Eden Wells had sought to “get to the truth of the matter,” and that had seen no evidence of Dr. Wells having committed crimes during her preliminary examination on potential charges including involuntary manslaughter.(Prosecutors charge that Dr. Wells, a member of Gov. Snyder’s cabinet, failed to protect the health and welfare of Flint area residents, including victims of Legionnaires’ disease outbreaks in the Flint area while the city used the Flint River as its water source in parts of 2014 and 2015: Dr, Wells is charged with attempting to withhold funding for programs designed to help the victims of the water crisis and with lying to an investigator about material facts related to a Flint investigation by the Michigan Attorney General’s Office.) 

Professor Edwards is among those who believe that Flint’s switch to river water without proper treatment to make it less corrosive triggered both elevated lead and increased Legionella bacteria in large buildings in Flint at the time, adding that he disagreed with the approach taken by the Flint Area Community Health and Environment Partnership, which contracted with the state to find the root cause of the Legionella outbreaks, which officials have reported lead to the deaths of at least a dozen people in Genesee County while the river was in use. Thus, Professor Edwards notes, instead of focusing on the potential for the bacteria in water filters, state fiscal resources would have been put to better use if directed to investigate cases tied to large buildings, particularly hospitals, where his own testing showed very high levels were present. Moreover, in response to the query whether Dr. Wells did anything to discourage his research, Prof. Edwards responded: “To the contrary. She seemed interested, and she encouraged it.”

The Fiscally Desperate State of a Small Municipality. Far to the east of Flint, in one of the nation’s oldest municipalities, Bristol, Virginia, a municipality which, in 1880, had a population of 1,562—a population which gradually grew to 19,042 in 1980, before waning to 16,060 by 2016. The area of what is, today, Bristol, was once inhabited by early Americans, Cherokee Indians, with the name, according to legend, because numerous deer and buffalo met there to feast in the canebrakes; it was subsequently renamed the site Sapling Grove, and then, in 1890, finally settled upon as Bristol. It used to have a fort on a hill overlooking what is now downtown Bristol: it marked an important stopping-off place for notables, including Daniel Boone and George Rogers Clark, as well as hundreds of pioneers, who found Bristol, a former trading post, way station, and stockade, to be a cornerstone to opening up a young nation to the West.  Now, a Virginia Auditor of Public Accounts (APA) new report has found the municipality may require state fiscal assistance to address its significant debt tied to The Falls development and landfill operations—having, at the end of last week, in its fiscal distress monitoring report of local governments, assessed the small city as scoring poorly on a set of financial metrics, including debt overload, cash flow issues, revenue shortfalls, deficit spending, billing issues, and a lack of qualified staff. The small municipality today has a median household income of $27,389. Approximately 13.2% of families and 16.2% of the population fall below federal poverty levels–including 25.8% of those under age 18. The Auditor’s report notes: “During follow-up with the City of Bristol, we observed two primary issues that we concluded are contributing to a situation of fiscal distress at the city: issues specific to the operational sustainability of its solid waste disposal fund and the debt and future revenues related to The Falls commercial development project,” positions which Bristol City Manager Randy Eads noted “exactly” portrayed the city’s financial problems, as opposed to preliminary findings released last year which included some incorrect information. Specific findings found that the city does not have unrestricted reserves to use for a revenue shortfall or unforeseen situations, and that the city is not in the “most desirable” position to meet its fiscal obligations without obtaining additional revenues.

As part of the report, the APA issued written notification to Gov. Ralph Northam, the General Assembly’s money committees, the Secretary of Finance, and city officials detailing these specific issues and recommending that Bristol may warrant further assistance from the state to help assess and stabilize areas of concern—with such potential state assistance including an independent consultant reviewing the viability of landfill operations and developing long-range financial forecasts for revenue—each items sought by the city. Or, as Manager Eads noted: “That’s something we requested from the APA. It’s our understanding there’s $500,000 the state has set aside to help low-scoring localities with some of their financial issues…We requested funds for a detailed financial analysis of the landfill and requested funds for a financial planning firm to help us with a three-, five- and 10-year financial forecast.” Manager Eads reports he plans to meet with Virginia legislators to seek support. Bristol’s solid waste fund has $33.5 million in long-term bond debt; the municipality’s general fund continues to transfer funds to pay bills, according to the report. The report notes that city officials completed a significant refinancing of all short-term debt earlier this year; however, debt remains a challenge: “However, the city’s increasing debt service costs continue to be a concerning factor, as Bristol’s ability to pay the debt service will be contingent upon sufficient future revenues received from The Falls project,” according to the report. The auditor’s office notes the city is entitled to additional sales tax revenues under provision of a state law, but notes “Bristol continues to experience some uncertainty with its long-term revenue stream and future growth after all phases of The Falls project are implemented.”