Can Municipal Insolvency Be Contagious?

eBlog, 10/24/16

Good Morning! In this a.m.’s eBlog, we consider the risks of fiscal contagion emanating from the historic city of Petersburg, Virginia, where the city’s virtual insolvency risks the solvency of the regional wastewater authority—and, therefore, the other participating municipalities. Next, with Election Day approaching, we travel to post-chapter 9 Stockton where the ballot issue of a sales tax increase on next month’s municipal ballot has divided the city’s candidates for Mayor and Council. Finally, we consider the exceptional challenges for the U.S. territory of Puerto Rico in the wake of the first PROMESA board meeting.

Can Municipal Insolvency Be Contagious? The South Central Wastewater Authority (SCWA), which provides wastewater treatment services to protect and enhance the environment for the City of Petersburg, the City of Colonial Heights, Chesterfield County, Dinwiddie County, and Prince George County, Virginia, may have to dip into its cash reserves and raise rates for its four other member municipalities if Petersburg fails to resume making its monthly payments very soon: to make up for the gap, each of the other four member jurisdictions would have to increase its monthly payments by approximately 61 percent. At a special meeting at the end of last week, the boards of the SCWA and the Appomattox River Water Authority were briefed on the outlook for SCWA’s finances due to Petersburg’s looming insolvency—with SCWA accounting manager Melissa B. Wilkins warning that unless the authority can tap some of its cash reserves, without Petersburg’s monthly payments, the Authority will be insolvent by the middle of next month—or, as she put it: “Right now, mid-October, we’re broke.” Indeed, forecasts provided to the directors, all municipal government officials from Petersburg, Chesterfield County, Colonial Heights, Dinwiddie County, and Prince George County, make clear that if SCWA does not begin to receive payments consistently by Petersburg and does not tap into its reserves, its operating cash will go into the red as early as next month: by the end of the fiscal year next June, the figures show the authority’s cash balance will be nearly $3 million in arrears. Ms. Wilkens advised that if Petersburg were to start making regular monthly payments beginning with the amount due for this month, and if SCWA were to shift about $996,000 in unused construction funds from a reserve account to the authority’s operating account, the authority would end the fiscal year with a positive cash balance of $35. Ms. Wilkin’s forecast assumes that SCWA will continue to operate under a “bare bones” budget—one which would not include any deposits into the authority’s reserves and puts a hold on any non-mandated construction projects. The key issue is that Petersburg imposes a disproportionate burden on the joint authority: the city accounts for approximately 55 percent of SCWA’s treatment load; ergo its share is of SCWA’s operating and maintenance costs. Its failure to do so means that to make up for the non-payment, each of the other four member municipalities would have to increase its monthly payments by about 61 percent.

The urgency and briefing come in the wake of the suit the authority filed against Petersburg last month, seeking the appointment of a receiver to oversee the city’s utility revenue and make sure the money collected from residents is used to pay SCWA and not for other purposes: the authority claims Petersburg owed it more than $1.5 million in overdue payments. Two weeks ago, Petersburg Circuit Court Judge Joseph M. Teefey Jr. opined that the suit contained “sufficient information that an emergency exists, and it is necessary that this court appoint a special receiver” to make sure residents’ wastewater payments are not used for other purposes, naming attorney Bruce Matson of the Richmond-based law firm LeClairRyan as the receiver. In addition, Judge Teefey, on his own initiative, ordered the city and the wastewater authority to meet with a mediator, McCammon Group of Richmond, because of “the special relationship of the parties to this action and the potential conflicts that are a consequence of these relationships.” In response, the City of Petersburg’s attorneys have filed a motion asking Judge Teefey to issue a stay of his order or to vacate it, because the appointment of a receiver automatically puts the city in technical default on more than $12 million in debt. The court has scheduled a hearing in the case for next Monday.)

For her part, Petersburg Interim City Manager Dironna Moore Belton, who represents the city on the SCWWA’s board, indicated she was hopeful the city would be able to resume making its monthly payments in the very near future, stating that the city is currently seeking a short-term loan to help that effort, advising the board Petersburg has identified a list of “key obligations” to be paid each month, which includes payments to regional authorities such as SCWWA, the Appomattox River Water Authority, and Riverside Regional Jail—albeit acknowledging that to keep current on those payments, that would “still not address some past-due payments.” Ms. Belton stated that city officials and their financial advisers “have a long-term package we are working on to address fiscal year 2016 past-due payments.”

Financing Post Municipal Bankruptcy City Services. Stockton residents in two weeks will have a say on whether to approve a quarter-cent restricted sales tax increase where the new revenues would be dedicated toward funding libraries, a recreation program, and other services in the city. The vote on Measure M is projected to generate $9 million a year and $144 million overall for library and recreation services, including after-school programs, homework centers, and children’s story times. It will be a heavy lift: Measure M requires approval of two-thirds of voters to pass. Since 1980, proponents argue, the city has underfunded its library and recreation services; they add that the city’s municipal bankruptcy and the recession “only compounded previously existing problems;” moreover, they argue that since 1980, the city’s population has doubled, but not a single new library has been built. The main goal for proponents of the tax is to get Stockton to go from an average spending per resident of $15 on public libraries and recreation to California’s median of $35 per capita. Last June, the City Council voted 5-2, with councilmen Michael Tubbs and Dan Wright opposing, to reopen the Fair Oaks Library; however, the facility is not expected to open for several months. The City’s Community Service Director John Alita, speaking as a private citizen, told the Stockton Record the city has had to close pools, has under maintained playing fields, and has reduced the average time libraries are open to less than 30 hours per week, noting: “The more that those things continue, then the less and less there is opportunity for our community members to actually benefit from these amenities that we made and created to provide for them…(The) combined benefit of restoring what would be a normal schedule to residents and then being able to enhance that in areas where there’s nothing right now, I think we see that as Measure M’s greatest benefit.” (Last year, the Stockton Unified School District had the lowest third-grade literacy rate in San Joaquin County at 16 percent, according to University of the Pacific’s annual San Joaquin Literacy Report Card.) All six of the city’s Council Members have endorsed Measure M, as have civil rights leader Dolores Huerta, San Joaquin County Superintendent of Schools James Mousalimas, the League of Women Voters, and the Greater Stockton Chamber of Commerce. As proposed, Measure M would essentially leave the sales tax unchanged, as a state sales tax increase approved by the passage of Proposition 30 in 2012 will expire this year.

Nonetheless, incumbent Mayor and candidate for re-election Anthony Silva, City Council candidate Steve Colangelo, and former Councilman Ralph Lee White have expressed apprehensions, testifying before the City Council last May they opposed approving a new tax when Measure A funds are not being used to fund library services. (Measure A, a three-quarter cent tax, was a tax increase approved by voters in 2014 with no restrictions, but with the city’s promise funds would be used to hire more police officers—a promise as yet unmet.) Mayor Silva, at a candidate’s forum last week, said: “I’m kind of caught in the middle on this one: All that money that we promised has not been spent exactly on what it was promised to you. So here comes another tax,” adding that Measure A had also promised to fund essential services, including opening libraries and pools; however, but none of those things were done…I love libraries…I love books, but the schools already have libraries.” Another opponent. Ned Leiba, a CPA, who closely monitors the Stockton’s finances, noting what he termed was poor management of Measure A funds and the city’s overall “problem with accounting and auditing,” stated: “You don’t want to give money to an entity that can’t be responsible.” Mr. Leiba, a member of the Measure A oversight committee, said that instead, Measure M proponents should pressure the city into using budgeted but unspent funds and not a new tax to open libraries. Stockton wants to “hold on to every shekel,” but there’s no basis for management’s claim that there’s no money, he added: “You want to exhaust all other remedies before you turn to taxes.” Were voters to adopt Measure M, a seven-member oversight committee would be appointed to do an annual review of how much money is generated and how funds are used. It appears that were the measure to pass, all dollars collected by the restricted sales tax would be placed in a separate city fund to be used for libraries and recreation services in Stockton.  

Wherefore the Promise of PROMESA? The process of unravelling insolvency is slow and frustrating: it can be even more trying where it involves a quasi-state and there are issues of sovereignty. Ergo, despite two meetings, the federal control board has, to date, evidenced scant progress—likely awaiting the outcome of both U.S. and Puerto Rico elections. Moreover, despite the ongoing recovery from the Great Recession, our respected colleagues at Municipal Market Analytics note that the fifty-two year-to-date first time payment defaulters so far this year has broken above last year’s trend (forty-eight between January and October), noting that in order for this year to finish with fewer defaults than last year (a trend that has held every year since MMA began collecting this data in 2009), “there can be no more than six additional defaults in November and December. Those two months have together averaged 14 defaults since 2013, strongly suggesting that 2016 will see a break in the downtrend.” For its part, the representatives of the U.S. territory advised the PROMESA Board it lacked any fiscal ability to finance any of its debt service over the next decade absent changes in federal laws to address both the island’s economy—and those provisions which harm its ability to compete against other Caribbean nations, noting that Puerto Rico’s GDP has contracted for nine of the last ten years in real terms, driven by the expiration of incentives provided under §936 of the U.S. tax code and the U.S. financial crisis, both of which were exacerbated by out-migration and extraordinary austerity measures taken by the Commonwealth, measures including reducing government consumption by 12% in real terms from 2006 through 2015, cutting the public administration headcount by approximately a quarter; reducing or deferring critical capital expenditures; delaying tax refunds and vendor payments; implementing significant new revenue measures, including recent sales and petroleum products tax increases generating approximately $1.4 billion annually; depleting liquidity and undertaking extraordinary short-term borrowings from pension and insurance systems; reforming pensions, converting defined benefit plans to defined contribution plans—austerity measures which they said had been insufficient to eliminate deficits, thereby incurring significant deficit financing, a ballooning debt load, and persistent economic decline, as evidenced by driving emigration to the U.S. mainland: a loss of not just some 9% of the island’s population—but disproportionately a loss for the best-educated.

The statistics, part of a 100-page fiscal plan submitted to the PROMESA Board, sought to identify the resources available to support basic governmental services and promote growth; it promised to put together a specific debt restructuring proposal in the wake of receipt of input from the Oversight Board. The plan warns that if the U.S. territory were to take various steps to improve revenues, reduce spending, and improve economic growth, it would still face a $6 billion gap over the decade—leaving no resources to meet commonwealth-supported debt. The plan addressed neither the financial outlook for Puerto Rico’s public corporations or municipalities (which also owe roughly $17 billion of debt). The plan treats $50.2 billion of debt as being addressed by the fiscal plan and the remainder of Puerto Rico’s debt as independent of it, because it is supported by the public corporations, municipalities, and other public entities. For priorities, Puerto Rico’s first is for Congress to continue Affordable Care Act funding to the Commonwealth beyond its planned end in FY2018—a continuation which the territory projects this could mean an additional $16.1 billion in direct Puerto Rico government revenues and an additional $8.4 billion in indirect revenues due to improved economic performance. Gov. Padilla also asked for an indefinite extension of the Affordable Care Act and that Congress treat Puerto Rico similarly to the 50 states with regard to Medicaid spending—and the extension of the earned income tax credit program to Puerto Rico, noting that such changes would lead to an $18.9 billion surplus, which could be used for the payments. This would be out of a total scheduled debt service of $34.2 billion. In its plan, the Governor recommended seven principals critical to reducing the government financing gap and restoring economic growth: any austerity must be minimal; the government must introduce improved budgetary controls and financial transparency; Puerto Rico needs to improve tax enforcement, consolidate agencies, reduce workforce, and reform its tax policy to eliminate the revenue impact of the planned end of the Act 154 tax in fiscal 2018; change local labor regulations, simplify permitting in order to promote economic growth, and invest in strategic growth-promoting projects. Fifth, Puerto Rico’s government must continue to protect vulnerable members of the population, such as the elderly, young, disabled, and poor through government services. The territory must reduce its debt to a “sustainable” level. And, seventh, the federal government must be involved to help generate economic growth.

He identified other concerns, as well, including caution in balancing amongst the island’s creditors, noting a “contingent value right or growth bond that pays creditors in the event growth targets set in the plan are exceeded should therefore be considered as part of any debt restructuring,” and that, because local municipal bondholders are believed to hold $8 billion to $12 billion of Puerto Rico’s debt, according to an official with the Puerto Rico Fiscal Agency and Financial Authority, the plan says there must be consideration of the impact of debt restructuring on the local economy. Finally, Puerto Rico Secretary of the Treasury Juan Zaragoza advised the board that Puerto Rico currently owes $1.3 billion to $1.35 billion to suppliers.

 

What Is a State’s Role in Averting Municipal Fiscal Contagion?

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eBlog, 9/28/16

Good Morning! In this a.m.’s eBlog, we consider, again, the risk of municipal fiscal contagion—and what the critical role of a state might be as the small municipality of Petersburg, Virginia’s fiscal plight appears to threaten neighboring municipalities and utilities: Virginia currently lacks a clearly defined legal or legislated route to address not just insolvency, but also to avoid the spread of fiscal contagion. Nor does the state appear to have any policy to enhance the ability of its cities to fiscally strengthen themselves. Then we try to go to school in Detroit—where the state almost seems intent on micromanaging the city’s public and charter schools so critical to the city’s long-term fiscal future. Then we jet to O’Hare to consider an exceptionally insightful report raising our age-old question with regard to: are there too many municipalities in a region? Since we’re there, we then look at the eroding fiscal plight of Cook County’s largest municipality: Chicago, a city increasingly caught between the fiscal plights of its public schools and public pension liabilities.  From thence we go up the river to Flint, where Congressional action last night might promise some fiscal hope—before, finally, ending this morn’s long journey in East Cleveland—where a weary Mayor continues to await a response from the State of Ohio—making the wait for Godot seem impossibly short—and the non-response from the State increasingly irresponsible.

Where Was Virginia While Petersburg Was Fiscally Collapsing? President Obama yesterday helicoptered into Fort Lee, just 4.3 miles from the fiscally at risk municipality of Petersburg, in a region where Petersburg’s regional partners are wondering whether they will ever be reimbursed for delinquent bills: current regional partners to which the city owes money include the South Central Wastewater Authority, Appomattox River Water Authority, Central Virginia Waste Management, Riverside Regional Jail, Crater Criminal Justice Academy, and Crater Youth Care Commission. Acting City Manager Dironna Moore Belton has apparently advised these authorities to expect a partial payment in October—or as a spokesperson of a law firm yesterday stated: “The City appears committed to meeting its financial obligations for these important and necessary services going forward and to starting to pay down past due amounts dating back to the 2016 fiscal year…We appreciate the plan the city presented; however we have to reserve judgment until we see whether the City follows through on these commitments.” One option, it appears, alluded to by the Acting City Manager would be via a tax anticipation note. Given the municipality’s virtual insolvency, however, such additional borrowing would likely come at a frightful cost.

The municipality is caught in a fiscal void. It appears to have totally botched the rollout of new water meters intended to reduce leakage and facilitate more efficient billing. It appears to be insolvent—and imperiling the fiscal welfare of other municipalities and public utilities in its region. It appears the city has been guilty of charges that when it did collect water bills, it diverted funds toward other activities and failed to remit to the water authority. While it seems the city has paid the Virginia Resources Authority to stave off default, questions have arisen with regard to the role of the Commonwealth of Virginia—one of the majority of states which does not permit municipalities to file for chapter 9 bankruptcy. But questions have also arisen with regard to what role—or lack of a role—the state has played over the last two fiscal years, years in which the city’s auditor has given it a clean signoff on its CAFRs; and GFOA awarded the city its award for financial reporting. There is, of course, also the bedeviling query: if Virginia law does not permit localities to go into municipal bankruptcy, and if Petersburg’s insolvency threatens the fiscal solvency of a public regional utility and, potentially, other regional municipalities, what is the state role and responsibility—a state, after all, which rightly is apprehensive that is its coveted AAA credit rating could be at risk were Petersburg to become insolvent.

In this case, it seems that Petersburg passed the Virginia State Auditor’s scrutiny because (1) it submitted the required documents according to the state’s schedule, regardless of whether or not the numbers were correct; (2) the firm used by the city was probably out of its league. (It appears Petersburg used a firm that specialized in small town audits); (3) the City Council apparently did not focus on material weaknesses identified by the private CPA (nor did the State Auditor). The previous city manager, by design, accident, or level of competence, simply did not put up much of a struggle when the Council would amend the budget in mid-year to increase spending—a task no doubt politically challenging in the wake of the Great Recession—a fiscal slam which, according to the State Auditor’s presentation, devastated the city’s finances, forcing the city in a posture of surviving off cash reserves. (http://sfc.virginia.gov/pdf/committee_meeting_presentations/2016%20Interim/092216_No2b_Mavredes_SFC%20Locality%20Fiscal%20Indicators%20Overview.pdf). Now, in the wake of fiscal failures at both levels of government, the Virginia Senate Finance Committee last week devoted a great deal of time discussing “early warning systems,” or fiscal distress trip wires which would alert a state early on of impending municipal fiscal distress. Currently, in Virginia, no state agency has the responsibility for such an activity. That augurs ill: it means the real question is: is Petersburg an anomaly or the beginning of a trend?

The challenge for the state—because its credit rating could be adversely affected if it fails to act, and Petersburg’s fiscal contagion spreads to its regional neighbors and public utilities, a larger question for the Governor and legislators might be with regard to the state’s strictures in Virginia which bar municipal bankruptcy, bar annexation, prohibit local income taxes, cap local sales tax, and have been increasing state-driven costs for K-12, line-of-duty, water and wastewater, etc.

Who’s Governing a City’ Future? Michigan Attorney General Bill Scheutte yesterday stated the state would close poorly performing Detroit schools by the end of the current academic year if they ranked among the state’s worst in the past three years in an official legal opinion—an opinion contradictory to a third-party legal analysis that Gov. Rick Snyder’s administration had said would prevent the state from forcing closure any Detroit public schools until at least 2019, because they had been transferred to a new debt-free district as part of a financial rescue package legislators approved this year—a state law which empowers the School Reform Office authority to close public schools which perform in the lowest five percent for three consecutive years. Indeed, in his opinion, Attorney General Scheutte wrote that enabling the state’s $617 million district bailout specified Detroit closures should be mandatory unless such closures would result in an unreasonable hardship for students, writing: “The law is clear: Michigan parents and their children do not have to be stuck indefinitely in a failing school…Detroit students and parents deserve accountability and high performing schools. If a child can’t spell opportunity, they won’t have opportunity.” The Attorney General’s opinion came in response to a request by Senate Majority Leader Arlan Meekhof (R-West Olive) and House Speaker Kevin Cotter (R-Mount Pleasant) as part of the issue with regard to whether the majority in the state legislature, the City of Detroit, or the Detroit Public Schools ought to be guiding DPS, currently under Emergency Manager retired U.S. Bankruptcy Judge Steven Rhodes would best serve the interest of the city’s children. It appears, at least from the perspective of the state capitol, this will be a decision preempted by the state, with the Governor’s School Reform Office seemingly likely to ultimately decide whether to close any number of struggling schools around the state—a decision his administration has said would likely be made—even as the school year is already underway—“a couple of months” away. The state office last month released a list of 124 schools that performed in the bottom 5 percent last year, on which list more than a third, 47, were Detroit schools.

Nevertheless, the governance authority to so disrupt a city’s public school system is hardly clear: John Walsh, Gov. Snyder’s director of strategic policy, had told The Detroit News that the state could not immediately close any Detroit schools, citing an August 2nd legal memorandum Miller Canfield attorneys sent Detroit school district emergency manager Judge Rhodes, a memorandum which made clear that the transferral of Detroit schools to a new-debt free district under the provisions of the state-enacted legislation had essentially reset the three-year countdown clock allowing the state to close them—a legal position the state attorney general yesterday rejected, writing: a school “need not be operated by the community district for the immediately preceding three school years before it is subject to closure.” Michigan State Rep. Sherry Gay-Dagnogo (D-Detroit) reacted to the state opinion by noting it would not give Detroit’s schools a chance to make serious improvements as part of so-called “fresh start” promised by the legislature as part of the $617 million school reform package enacted last June, noting that she believes the timing of its release—just one week before student count day—is part of an intentional effort to destabilize the district: “We could possibly lose students, because parents are afraid and confused, that’s what this is all about…They want the district to implode…They want to completely remake public education, and implode the district to charter the district. There’s big money in charter schools…This is about business over children.”

Are There Too Many Municipalities? Can We Afford Them All? The Chicago Civic Federation recently released a report, “Unincorporated Cook County: A Profile of Unincorporated Areas in Cook County and Recommendations to Facilitate Incorporation,” which examines unincorporated areas in Cook County—a county with a population larger than that of 29 individual states—and the combined populations of the seven smallest states—a county in which there are some 135 incorporated municipalities partially or wholly within the county, the largest of which is the City of Chicago, home to approximately 54% of the population of the county. Approximately 2.4%, or 126,034, of Cook County’s 5.2 million residents live in unincorporated areas of the County and therefore do not pay taxes to a municipality. According to Civic Federation calculations, Cook County spends approximately $42.9 million annually in expenses related to the delivery of municipal-type services to unincorporated areas, including law enforcement, building and zoning and liquor control. Because the areas only generate $24.0 million toward defraying the cost of these special services, County taxpayers effectively pay an $18.9 million subsidy, even as they pay taxes for their own municipal services. The portion of Cook County which lies outside Chicago’s city limits is divided into 30 townships, which often divide or share governmental services with local municipalities. Thus, this new report builds on the long-term effort by the Federation in the wake of its 2014 comprehensive analysis of all unincorporated areas in Cook County as well as recommendations to assist the County in eliminating unincorporated areas. .In this new report, the Federation looks at the $18.9 million cost to the County of providing municipal-type services in unincorporated areas compared to revenue generated from the unincorporated areas, finding it spent approximately $18.9 million more on unincorporated area services than the total revenue it collected in those areas in FY2014, including nearly $24.0 million in revenues generated from the unincorporated areas of the county compared to $42.9 million in expenses related to the delivery of municipal-type services to the unincorporated areas of the county—or, as the report notes: “In sum, all Cook County taxpayers provide an $18.9 million subsidy to residents in the unincorporated areas. On a per capita basis, the variance between revenues and expenditures is $150, or the difference between $340 per capita in expenditures versus $190 per capita in revenues collected. The report found that in that fiscal year, Cook County’s cost to provide law enforcement, building and zoning, animal control and liquor control services was approximately $42.9 million or $340.49 per resident of the unincorporated areas. The following chart identifies the Cook County agencies that provide services to the unincorporated areas and the costs associated with providing those services. The county’s services to these unincorporated areas are funded through a variety of taxes and fees, including revenues generated from both incorporated and unincorporated taxpayers to fund operations countywide: some revenues are generated or are distributed solely within the unincorporated areas, such as income taxes, building and zoning fees, state sales taxes, wheel taxes (the wheel tax is an annual license fee authorizing the use of any motor vehicle within the unincorporated area of Cook County). The annual rate varies depending on the type of vehicle as well as a vehicle’s class, weight, and number of axles. Receipts from this tax are deposited in the Public Safety Fund. In FY2014 the tax generated an estimated $3.8 million., and business and liquor license fees, but the report found these areas also generated revenues from the Cook County sales and property taxes, which totaled nearly $15.5 million in revenue, noting, however, those taxes are imposed at the same rate in both incorporated and unincorporated areas and are used to fund all county functions. With regard to revenues generated solely within the unincorporated areas of the county, the Federation wrote that the State of Illinois allocates income tax funds to Cook County based on the number of residents in unincorporated areas: if unincorporated areas are annexed to municipalities, then the distribution of funds is correspondingly reduced by the number of inhabitants annexed into municipalities. Thus, in FY2014, Cook County collected approximately $12.0 million in income tax distribution based on the population of residents residing in the unincorporated areas of Cook County. The report determined the Wheel Tax garnered an estimated $3.8 million in FY2014 from the unincorporated areas; $3.7 million from permit and zoning fees (including a contractor’s business registration fee, annual inspection fees, and local public entity and non-profit organization fees (As of December 1, 2014, all organizations are required to pay 100% of standard building, zoning and inspection fees.). The County receives a cut of the Illinois Retailer’s Occupation Tax (a tax on the sale of certain merchandise at the rate of 6.25%. Of the 6.25%, 1.0% of the 6.25% is distributed to Cook County for sales made in the unincorporated areas of the County. In FY2014 this amounted to approximately $2.8 million in revenue. However, if the unincorporated areas of Cook County are annexed by a municipality this revenue would be redirected to the municipalities that annexed the unincorporated areas.) Cook County also receives a fee from cable television providers for the right and franchise to construct and operate cable television systems in unincorporated Cook County (which garnered nearly $1.3 million in revenue in FY2104). Businesses located in unincorporated Cook County pay an annual fee in order to obtain a liquor license that allows for the sale of alcoholic liquor. The minimum required license fee is $3,000 plus additional background check fees and other related liquor license application fees. In FY2014 these fees generated $365,904. Finally, businesses in unincorporated Cook County engaged in general sales, involved in office operations, or not exempt are required to obtain a Cook County general business license—for which a fee of $40 for a two-year license is imposed—enough in FY2014 for the county to count approximately $32,160 in revenue.

Who’s Financing a City’s Future? It almost seems as if the largest municipality within Cook County is caught between its past and its future—here it is accrued public pension liabilities versus its public schools. The city has raised taxes and moved to shore up its debt-ridden pension system—obligated by the Illinois constitution to pay, but under further pressure and facing a potential strike by its teachers, who are seeking greater benefits. The Chicago arithmetic for the public schools, the nation’s third-largest public school district is an equation which counts on the missing variables of state aid and union concessions—neither of which appears to be forthcoming. Indeed, this week, Moody’s, doing its own moody math, cut the Big Shoulder city’s credit rating deeper into junk, citing its “precarious liquidity” and reliance on borrowed money, even as preliminary data demonstrated a continuing enrollment decline drop of almost 14,000 students—a decline that will add fiscal insult to injury and, likely, provoke potential investors to insist upon higher interest rates. According to the Chicago Board of Education, enrollment has eroded from some 414,000 students in 2007 to 396,000 last year: a double whammy, because it not only reduces its funding, but likely also means the Mayor’s goal of drawing younger families to move into the city might not be working. In our report on Chicago, we had noted: “The demographics are recovering from the previous decade which saw an exodus of 200,000. In the decade, the city lost 7.1% of its jobs. Now, revenues are coming back, but the city faces an exceptional challenge in trying to shape its future. With a current debt level of $63,525 per capita, one expert noted that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Nevertheless, unemployment is coming down (11.3% unemployment, seasonally adjusted) and census data demonstrated the city is returning as a destination for the key demographic group, the 25-29 age group, which grew from 227,000 in 2006 to 274,000 by end of 2011.) Ergo, the steady drop in enrollment could signal a reversal of those once “recovering” demographics. Or, as Moody’s notes, the chronic financial strains may lead investors to demand higher interest rates—rates already unaffordably high with yields of as much as 9 percent, according to Moody’s. Like an olden times Pac-Man, principal and interest rate costs are chewing into CPS’s budget consuming more than 10 percent of this year’s $5.4 billion budget, or as the ever perspicacious Richard Ciccarone of Merritt Research Services in the Windy City put it: “To say that they’re challenged is an understatement…The problems that they’re having poses risks to continued operations and the timely repayment of liabilities.” Moody’s VP in Chicago Rachel Cortez notes: “Because the reserves and the liquidity have weakened steadily over the past few years, there’s less room for uncertainty in the budget: They don’t have any cash left to buffer against revenue or expenditure assumptions that don’t pan out.” And the math threatens to worsen: CPS’ budget for FY2016-17 anticipate the school district will gain concessions from the union, including phasing out CPS’ practice of covering most of teachers’ pension contributions—a phase-out the teachers’ union has already rejected; CPS is also counting on $215 million in aid contingent on Illinois adopting a pension overhaul—the kind of math made virtually impossible under the state’s constitution, r, as Moody’s would put it: an “unrealistic expectations.” Even though lawmakers approved a $250 million property-tax levy for teachers’ pensions, those funds will not be forthcoming until after the end of the fiscal year—and they will barely make a dent in CPS’s $10 billion in unfunded retirement liabilities.

Out Like Flint. The City of Flint will continue to receive its water from the Great Lakes Water Authority for another year, time presumed to be sufficient to construct a newly required stretch of pipeline and allow for testing of water Flint will treat from its new source, the Karegnondi Water Authority (KWA). The decision came as the Senate, in its race to leave Washington, D.C. yesterday, passed legislation to appropriate some $170 million—but funds which would only actually be available and finally acted upon in December when Congress is scheduled to come back from two months’ of recess—after the House of Representatives adopted an amendment to a water projects bill, the Water Resources Development Act, which would authorize—but not appropriate—the funds for communities such as Flint where the president has declared a state of emergency because of contaminants like lead. Meanwhile, the Michigan Strategic Fund, an arm of the Michigan Economic Development Corp., Tuesday approved a loan of up to $3.5 million to help Flint finance the $7.5-million pipeline the EPA is requiring to allow treated KWA water to be tested for six months before it is piped to Flint residents to drink. While the pipeline connecting Flint and Lake Huron is almost completed, the EPA wants an additional 3.5-mile pipeline constructed so that Flint residents can continue to be supplied with drinking water from the GLWA in Detroit while raw KWA water, treated at the Flint Water Treatment Plant, is tested for six months. The Michigan Department of Environmental Quality is expected to pay $4.2 million of the pipeline cost through a grant, with the loan covering the balance of the cost. Even though the funds the Strategic Fund has approved is in the form of a loan, with 2% interest and 15 years of payments beginning in October of 2018, state officials said they were considering various funding sources to repay the loan so cash-strapped Flint will not be on the hook for the money. Time is of the essence; Flint’s emergency contract for Detroit water, which has already been extended, is currently scheduled to end next June 30th.  

Waiting for Godot. Last April 27th, East Cleveland Mayor Gary Norton wrote to Ohio State Tax Commissioner Joseph W. Testa for approval for his city to file chapter 9 bankruptcy: “Given East Cleveland’s decades-long economic decline and precipitous decrease in revenue, the City is hereby requesting your approval of its Petition for Municipal Bankruptcy. Despite the City’s best Efforts, East Cleveland is insolvent pursuant…Based upon Financial Appropriations projections for the years 2016, 2017, 2018 and 2019, the City will be unable to sustain basic Fire, Police, EMS or rubbish collection services. The City has tried to negotiate with its creditors in good faith as required by 11 U.S.C. 109. It has been a somewhat impracticable effort. The City’s Financial Recovery Plan, approved by the City Council, the Financial Commission and the Fiscal Supervisors, while intended to restore the City to fiscal solvency, will have the effect of decimating our safety forces. Hence, our goal to effect a plan that will adjust our debts pursuant to 11 U.S.C. 109 puts us in a catch-22 that is unrealistic. This is particularly true now that petitions for Merger/Annexation with the City of Cleveland have been delayed by court action in the decision of Cuyahoga County Common Pleas Judge Michael Russo, Court Case No. 850236.” Mayor Norton closed his letter: “Thank you for your prompt consideration of this urgent matter.” He is still waiting.

 

Can Municipal Insolvency Affect Neighboring Municipalities?

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eBlog, 9/23/16

In this morning’s eBlog, we consider the chances of getting high in San Bernardino—the city in municipal bankruptcy longer than any other in U.S. history—but now on the verge not only of elections, but also ballot questions, including the legalization of marijuana—something which could, presumably not only make citizens high, but mayhap municipal revenues higher. Then we veer East to Michigan, where the complex issues imposed by the legislature on the virtually insolvent Detroit Public Schools, via the creation of a state-imposed charter and public school system has created threatening credit problems—as well as governance problems for the Detroit Public Schools. Finally, we head further East to the small Virginia municipality of Petersburg, famous as a site during the Civil War where, in nine months of trench war in which vastly outnumbered confederate forces warded off Gen. Ulysses S. Grant, the city was the essential supply line to Confederate Commander Robert E. Lee. Today, the historic city faces a fiscal rather than armed challenge—it is virtually insolvent—and, as we note—because now, as then, the small city is connected to other cities in the state, its insolvency could have ever widening fiscal ramifications–or fiscal contagion– for other municipalities…We wonder what the tipping point into insolvency might be–or when the Commonwealth of Virginia might feel compelled to act.  

Electing a Higher Future for Post-Chapter 9 San Bernardino? San Bernardino City Manager Mark Scott has informed the City Council he will not allow any of the traditional election forums or local election broadcasts unless a majority of the council members vote to undo his decision—even as Councilman Henry Nickel responded he considered that to be a decision which ought to be determined by the city’s elected leaders, calling it a “suppression of the First Amendment rights of the public to hear items that are relevant to our government: It is not up to the unilateral decision of the city manager to deviate substantially from prior practice and policy until and unless it has been presented by the City Council, which has the policy-making power both under the current charter and the (proposed) new city charter.” In his email to his colleagues on the Council, he emphasized, however, that even though the Council could reinstate election events and broadcasts, there might be a conflict of interest: “Just so you know, UNLESS directed otherwise by Council action, we have told those who have asked that we will NOT allow use of the Council Chamber for any election events or taping between now and the November election, nor will we be doing any local election broadcasts on Channel 3,” acknowledging that even though this “has been done in the past,” it just seemed “smart to stay completely arms’ length” this election year. The discussion came as city officials worked on and endorsed a measure that would replace San Bernardino’s city charter and another that would allow marijuana in the city—with the first measure, Measure L, to allow voters to replace the existing city charter with a new one created by a charter review committee—which, by a 6-1 vote, Council adopted. The manager’s announcement would also—unless reversed—mean there would be no public discussion about getting high on the three pending marijuana legalization measures—where all three have been authored by advocates of legalization and none representing the view that dispensaries should remain illegal—in part because only one counter-argument is printed against each measure for the November ballot, and — by random chance — City Clerk Gigi Hanna had selected arguments against each measure that had been filed by proponents of competing measures. (If more than one measure receives more than 50 percent of the vote, whichever measure gets the most “yes” votes will become law…) The city has had a medical marijuana ban on its books since 2007, but enforcement was ineffective, with dispensaries dotting the city in open defiance. City officials had attempted on several occasions to replace the ban with what they hoped would be a more effective regulatory framework; however, they were preempted last July when the City Council determined resident Vincent Guzman had secured sufficient signatures that legally his measure had to be put November’s ballot—Measure O—with Mr. Guzman having written: “Measure O is the only one to generate significant tax revenue for San Bernardino: It funds both enforcement and general city services. It reduces the number of dispensaries and eliminates them near our schools and homes.” In his advocacy, Mr. Guzman cited a study by economist Beau Whitney estimating that Measure O [“The San Bernardino Regulate Marijuana Act of 2016”] would allow an outside special interest group to establish a marijuana monopoly in the city,” the argument against contends: “Measure O circumvents local control and does not comply with our local general plan and land use policies.” Nevertheless, proponents claim the measure, if adopted, would generate between $19.5 million and $24.8 million in revenue for San Bernardino in addition to 2,750 jobs. Opening the doors to getting municipally high stimulated a second group to secure sufficient signatures to place its own, alternative regulation plan on the ballot—all of which led the City Council to draft its own version, which would require separate licenses for marijuana cultivation, marketing, testing, distribution, and dispensaries; application fees and enforcement fees would be set yearly to match the cost of providing the service. Under the city’s version, dispensaries could only be within industrial zones, and could not be within 600 feet of a school, park, library or recreation center, nor within 100 feet of a residential zone or religious center; and no two dispensaries could be within 1,000 feet of each other, amounting to a significant limitation on the number of dispensaries, according to Graham, the primary author of the initiative. The city’s proposal is on the ballot as Measure P, and it’s supported by the same group that opposed Measure O: “Measure P is the only medical marijuana ordinance supported and put on the ballot by our local elected officials,” the group’s ballot statement reads:  “Measure P was drafted by the city attorney’s office – and not by marijuana industry special interest groups.” The argument says Measure P is the only one that would retain local control, “including a potential ban.” In the alphabetic voting guide for readers, the other citizen-submitted ballot item, Measure N, an anti-marijuana measure supported by several City Council members, who claim that even though the harmful effects of marijuana are well-documented, the proponents continue to advocate for its legalization: “The legalization experiment in Colorado and Washington is a disaster. The ‘Regulate and Control’ policy attempt has failed, yielding huge increases in underage and adult use, and drugged driving.” That opposition is signed by Mayor Davis and City Council Members Jim Mulvihill, Fred Shorett, and Virginia Marquez.

Under the math, if voters provide more than 50 percent on the city’s drafted measure and more “yes” votes than either of the citizen-submitted initiatives, the municipally-written measure would become law. Moreover, unlike those initiatives, it could be modified as state law regarding marijuana changes, which led the City Council to put the medical marijuana regulation on the ballot in a 5-2 vote—albeit reluctantly, in some cases. The most vocal advocate of the ban has been Mayor Carey Davis, who gave extensive evidence that marijuana legalization has been harmful in Colorado and suggested it would stretch thin an already understaffed police department. But the city had no legal alternative to putting the two citizen initiatives on the ballot — other than immediately adopting the framework they suggest, and Deputy City Attorney Steven Graham said that was not an option, either, for the measure that imposed a tax on marijuana. (California law forbids cities from passing a tax without a vote of the public. It is unclear legally whether a voter-originated tax can pass in an election at which Council Members are not up for a vote, which is the case in November according to Counselor Graham.) The City-drafted measure would require:

  • separate licenses for marijuana cultivation, marketing, testing, distribution, and dispensaries;
  • application fees and enforcement fees would be set yearly to match the cost of providing the service;
  • Dispensaries could only be within industrial zones, and could not be within 600 feet of a school, park, library or recreation center, nor within 100 feet of a residential zone or religious center;
  • And no two dispensaries could be within 1,000 feet of each other, amounting to a significant limitation on the number of dispensaries, said Graham, the primary author of the initiative.

Protecting Tomorrow’s Leaders? The Michigan Finance Authority has approved a plan to issue $235 million of debt to refund some Detroit Public Schools (DPS) municipal bonds before they lose their state aid backing at the end of this month, approving an authorizing resolution for the issuance to be backed solely by an existing 18-mill non-homestead levy—with the fabulous Matt Fabian of Municipal Market Analytics warning the “investor will be at risk if the levy produced by the 18 mills continues to decline or is disrupted by, for example, assessment appeals in the future. Some kind of state backstop or protection would be needed to make this investment grade.” The Michigan Finance Authority has not, however, provided any indication with regard to whether it intends to backstop the bond refunding, albeit the Authority has stated the outstanding bonds will be refunded and defeased at par “plus any applicable redemption premium and accrued interest,” suggesting that those bondholders will be made whole—albeit with the uncertainty remaining that should the state-aid pledge evaporate or shift, there would be likely adverse credit quality implications, because of the shift to entire reliance on a property tax pledge. The outstanding bonds lost their investment grade status amid uncertainty about the state planned to restructure the debt after the state-ordered restructuring of Detroit Public Schools took effect July 1. The state assistance is set to shift to the state-mandated newly formed public school district that operates schools while the former district remains intact only to collect taxes and repay bonds. Under the provisions, the operating levy of roughly $50 million to $60 million per year will go to pay off debt service on the refunding bonds, which will retire 2011 and 2012 DPS state aid bonds with a final maturity of 2023. The state Finance Authority intends to issue the refunding bonds on or before the end of this month—the date when the current, outstanding bonds lose their state aid backing because, without students, the old district will no longer be able to collect state aid. The pending switch could cause fiscal shivers: the existing municipal bonds had initially carried S&P A ratings because of the state aid pledge; they also carried a limited tax general obligation pledge—albeit DPS’s underlying GO credit ratings are junk level—or, in school parlance, D-, with S&P last week having demoted the credit rating from B to BB-minus, warning that with the October deadline looming closer and ushering in the new fiscal year, there is increasing doubt with regard to whether bondholders would receive full and timely payment on their bonds—with the new drop the third such comparable action over the last three months—moodily moving in some syncopation with Moody’s, which recently revised the outlook on DPS’ Caa1 issuer rating to “developing” from “negative.”

What External Event Can Force a Municipality into Chapter 9 Bankruptcy? The City of Petersburg, the small, independent city in Virginia, a municipality on the steep edge of insolvency, and in which there seems little indication the Virginia legislature is poised to step in, a new shoe has dropped that would seem likely to precipitate a defining event: the South Central Wastewater Authority has filed a $1.2 million lawsuit over unpaid sewer bills, noting the has failed to pay for any wastewater services since May: “The City of Petersburg charges its residents for wastewater service. Under the service agreement between South Central and the city, these fees should be used to pay the costs of that service, including the costs of having the wastewater treated by South Central.” The suit seeks the appointment of a receiver to make sure the more than $1 million the authority says it is owed is not spent by the city on other things. According to the suit, filed in Petersburg Circuit Court, the authority is not only seeking to recover past-due amounts, but also requesting that the court appoint a receiver to supervise Petersburg’s billing and collection of wastewater fees from its residents, writing: “South Central seeks this appointment to ensure that the money is used for its intended purposes and that residents continue to receive the wastewater service they pay for…South Central is particularly dependent upon the regular and timely payment by the city of Petersburg, whose share of these costs account for more than half of South Central’s budget for operations and maintenance.” In addition to seeking payment of about $1.5 million in overdue service charges and penalties, South Central said it was filing the lawsuit “to request the court to appoint a receiver to supervise Petersburg’s billing and collection of wastewater fees from its residents. South Central seeks this appointment to ensure that the money is used for its intended purposes and that residents continue to receive the wastewater service they pay for,” adding that while the utility “appreciates the difficult financial circumstances the city of Petersburg is experiencing. Nevertheless, efforts to resolve the arrearages have been unsuccessful and — if left unaddressed — threaten the continued operation of South Central and the finances of the other member localities and their residents.” That is, there is a fiscal interdependence, and insolvency by Petersburg could have consequences for other Virginia public authorities, including the other four Virginia municipalities served by South Central. For its part, the city had billed residents for the service, but has not been remitting the fees to the CVWMA — a situation similar to what prompted South Central’s lawsuit. In response, interim Petersburg City Attorney Mark Flynn unsurprisingly noted the city “is disappointed that the authority has chosen to file a lawsuit,” adding that the “city is and has been working with the authority to resolve the amounts it owes: The lawsuit does not help the city and the authority in achieving resolution for the city’s obligations. As the authority and citizens know, the City Council and management have been working to resolve the city’s financial difficulties.” Moreover, for the municipality, in which a recent state audit of its finances determined the city is facing a $12 million budget gap in the current fiscal year while dealing with nearly $19 million in unpaid bills, including those to South Central, the suit threatens to unravel efforts by city officials to close the budget gap and repay unpaid obligations—efforts including its approval earlier this month of a series of austerity measures aimed at freeing up much-needed cash flow, including tax increases, pay cuts of city staff members, and the closing of the city’s three museums.

When it Rains, it Pours. The suit could hardly have come at a more inopportune time—as Rochelle Small-Toney, a deputy city manager in Fayetteville, North Carolina, has just removed herself out of the competition to be the city’s next city manager, according to Petersburg Mayor W. Howard Myers III—she had been in the city last week as City Council convened to hire a city manager in the midst of an ongoing financial crisis; however, Council Members were unable to agree on a hire and adjourned the meeting without taking action after local media reported that Ms. Small-Toney had resigned in the midst of a financial controversy from a previous position as city manager of Savannah, Georgia; ergo, the Council had voted unanimously to hire an executive search firm to conduct a national search for a new city manager—albeit with what funds unclear. Indeed, when asked by Ward 4 Councilman Brian Moore what funding source could be tapped to pay for the search, he was advised to talk with the city’s Finance Department and negotiate the best possible financial arrangement: Petersburg has been operating without a permanent city manager since early last March, when William E. Johnson III was fired amid the municipality’s emerging fiscal crisis and a furor over the mishandling of a plan to replace water meters throughout the city. Former City Attorney Brian Telfair resigned at the same time for health reasons. Dironna Moore Belton, who was the general manager of Petersburg Area Transit at the time, was named shortly afterward as interim city manager. At the same time, Mark Flynn of the Richmond law firm of Woodley & Flynn was contracted to act as interim city attorney. Ms. Belton is one of the applicants for the permanent city manager position; however, it is unclear whether she and the other candidates will have to re-apply if a search firm is hired.

What Comes After Municipal Bankruptcy?

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eBlog, 8/12/16

In this morning’s eBlog, we consider post municipal bankruptcy elections: how does a city choose a course for the future? Here, the choices seem bleak in Stockton—the city nearly one full year out of bankruptcy. Then we consider the ongoing state-local challenges between the State of New Jersey and Atlantic City—a city not far from the knife edge of insolvency, followed by the rhythmic efforts of retired U.S. Bankruptcy Judge Steven Rhodes to get the new Detroit Public Schools the best possible leaders in his current position as the state-appointed emergency manager. Then we observe the process underway in Florida with a state oversight effort to assess the options for the future of Opa-locka. Finally, we consider the dire water situation in East Cleveland—the small city awaiting a determination of its fate: whether it will be chapter 9 municipal bankruptcy or incorporation into the City of Cleveland.

Post Municipal Bankruptcy Blues.  For a city emerging from municipal bankruptcy, the road from insolvency to recovery can be steep. In Stockton, California, where the frieze above the steps of City Hall reads: “To inspire a nobler civic life: to fulfill justice; to serve the people,” the question for the city’s voters appears to be a dispiriting choice in November’s mayoral election—the city’s first post municipal bankruptcy election—one pitting incumbent and just arrested Mayor Anthony Silva against a young City Councilmember with a pending DUI charge, Michael Tubbs. The election will mark the city’s first post-bankruptcy election in the wake of last year’s decision by U.S. Bankruptcy Judge Christopher Klein a year ago in February to approve the city’s plan of debt adjustment—a plan approved in the wake of the municipality’s success in securing voter support for more than a 10 percent increase in the local sales tax—with the bulk of the new revenues dedicated to address apprehensions about crime. The approved debt-adjustment plan provided for reductions in public employee benefits, funding cuts for police and fire, and reduced payments to the city’s creditors. (City Council members had already unanimously approved personnel cuts two years prior to the filing, but further cuts were made to parks, library, and senior programs.) The plan of debt adjustment approved by Judge Klein also eliminated post-retirement health care benefits valued at a minimum of $300 million, but continued payments for retirement benefits via the California Public Employees’ Retirement System (CalPERS). Now, in the first post-municipal bankruptcy municipal election, it seems key issues confronting voters are the city’s crime rate (albeit, now the two candidates’ crime rates)—and the question with regard to how the court-approved plan of debt adjustment will shape elections for mayor and three of six city council seats on November 8th. Mayoral candidates Mayor Anthony Silva and challenger Michael Tubbs have and are sparring over the best post-bankruptcy direction for the city.

Mayor Silva won election to his current office in November 2012 by tying his opponent to the consequences of the city’s bankruptcy, criticizing his predecessor for a year of high crime rates and failure to properly oversee the city’s finances. After securing election, he pressed for an increase in sales taxes to pay for law enforcement costs, which ultimately reached the ballot in November 2013 after adjustments by the city council. In the wake of the city’s emergence from chapter 9, Mayor Silva has promoted plans for new business development in Stockton to generate more revenue: he proposed a $170 million development plan in December of last year, a plan which included expanding the airport for international flights and spending $72 million to add arcades and rides on the river walk. The Mayor also proposed opening abandoned warehouses as shelters for the homeless. But his road to re-election took a significant detour earlier this month in the wake of his arrest at his Mayor’s Youth Camp in Silver Lake, California, where he was charged with playing strip poker with naked teenagers, providing alcohol to minors, and illegally recording the activities that are said to have occurred at last year’s camp in the wee hours of Aug. 7, 2015. That morning five unmarked law enforcement vehicles rolled onto the rustic grounds of the Stockton Municipal Camp at about 9:30 a.m.: two of them parked so they would block the one-lane road to enter and exit the site: Thirty minutes later, without incident, Mayor Silva was driven away by officers in one of the unmarked vehicles and taken to the Amador County Jail, where he was booked by Amador County sheriff’s officers. His first court date is scheduled for next week at Amador County Superior Court: the Amador County District Attorney’s Office and the FBI are the investigating agencies. The arrest does not bode well for his re-election campaign.

In the Clear? Moody’s credit ratings agency has reported that the state loan to Atlantic City should offer the requisite time for the Mayor and Council to draft a five-year budget plan which would avert not only municipal bankruptcy, but also a threatened state takeover. Moody’s yesterday wrote that the $73 million state loan is a positive for the city’s junk credit rating—and that, absent the loan, there would have been a high probability the city would default on its debt in the next few months. Moody’s, being more characteristically moody, however, added that the planned Trump Taj Mahal closure could further cut the amount of tax revenues to the municipality, writing that the city’s fiscal condition remains dire because of its dependence on the shrinking casino industry.

More Schooling on Insolvency. Retired U.S. bankruptcy Judge and current Detroit Public Schools state-appointed emergency manager Steven Rhodes yesterday reported he had met with Michigan Gov. Rick Snyder this week and had agreed to extend his contract as transition manager of the DPS until January—the date the new school board is to be sworn in. Judge Rhodes defined the election of the new board as “the single most critical issue” DPS confronts this fall, noting whomever is elected must come to the position committed to transforming DPS into a system that will not only adapt to the future needs of its 45,000 students and earn the support of the region’s businesses, but also its religious and civic communities—important enough indeed that the Judge spent two hours in a special session with 53 of the 68 candidates vying for office to fill them in on DPS’ condition and answer questions about the job. Judge Rhodes plans more such sessions. In addition, he has encouraged all of the candidates to get training on how to be an effective school board member. Judge Rhodes has been direct and clear about what those elected should bring to the table: “It may feel simplistic, but it’s the kind of stuff that can’t be emphasized enough…The No. 1 thing is commitment to serve as a trustee for the benefit of the district’s students. What that means is there’s no other agenda, no vision on higher office, no self-aggrandizement. It’s got to be all about the district’s students.” He added that new board members must recognize that DPS is not just for college-bound children, but for those whose future vocations can be taught outside of universities, and he said the board must find ways “to compensate teachers whose dedication and sacrifice.” They must commit themselves to excellence in academics and commit to hiring a permanent superintendent with that same commitment, while at the same time recognizing the diverse needs and interests of each of DPS’s 45,000-plus students: “They’re not all going to college. Many have special needs. Some want to do career technical education. Our academic offerings need to be as diverse as our student interests.” Judge Rhodes also warned that education “does not begin when the child walks into the school door and end when the child leaves the school door: “there has to be a continuing commitment to parental engagement in the educational process.”

Interestingly the electric rhythm guitar player of the famous Indubitable Equivalents also noted that he expects new DPS board members to respect the Financial Review Commission, a state entity created as part of the city’s plan of debt adjustment, but which has created some resentment in the city—stating: “This will be challenging, but the FRC is a fact of life, and they really do want to help…The nature of the FRC’s role and responsibilities in relation to DPSCD (Detroit Public Schools Community District) is going to be a matter of continuing discussion and negotiation. The school board…will continue that conversation. There will not be an emergency manager per se, but the enabling legislation for the Financial Review Commission is subject to interpretation, and that will take time to work out. There is a view which says it isn’t just to balance budgets and books of record, but no one over there wants to be involved in day-to-day academic issues.” Finally, Judge Rhodes urged that the new board would need to work with Mayor Mike Duggan—urging an end to what he called the “us versus them” mentality, both in and outside the city of Detroit: “[The school board has to figure out a way to break through that on both sides of the city boundaries.” Finally, and appropriately, he noted new school board members must be willing to learn: “Being an effective school board member is an art. It has to be learned so there has to be a commitment to learn how to do that.”

Oompapa. A south Florida public administrator, Merrett Stierheim, will determine if Opa-locka is solvent for a Florida state-appointed panel Gov. Rick Scott appointed last June 1st in the wake of the city’s entering into an agreement seeking the state’s assistance, which does not include funding. The panel is charged with overseeing the small municipality’s finances and to report upon the “gravity of the situation faced by Opa-locka,” as well as to oversee the hiring of a Finance Director for the city, according to Melinda Miguel, Chair of the Financial Emergency Board. Ms. Miguel made the announcement yesterday after noting the state appointed emergency board had received incomplete financial reports and requests for payments without details or invoices. Ms. Stierheim comes to the challenge with a background of experience with other fiscally challenged municipalities, including Miami in the late 1990’s, when it was in the midst of a corruption scandal and a financial crisis that led then-Gov. Lawton Chiles to appoint a Financial Emergency Board. Chair Miguel, who is Gov. Scott’s chief inspector general, yesterday said Opa-locka Mayor Myra Taylor had approached her for a second time requesting that the state provide the city a bridge loan, such as an advance on revenue-sharing funds—the city is apprehensive it could run out of cash before the end of next month. In addition to those fiscal and legal challenges, the SEC has opened an inquiry into whether proper disclosures were made about the city’s fiscal state, and there are federal corruption investigations ongoing: last week, the former city manager, David Chiverton, and former public works supervisor, Gregory Harris, were arrested and charged with taking kickbacks from business owners and individuals. Ms. Miguel mentioned the arrests in her opening statement, noting the city’s residents and taxpayers have “paid a steep price” by placing trust in their government officials, adding: “The citizens of Opa-locka have a right to know that their money is well spent…Instead, we see corruption. We must continue on our search for the truth.”

A Different Kind of Water Problem than Flint. East Cleveland, Ohio, a small municipality awaiting a decision whether it may file for chapter 9 municipal bankruptcy or become a part of the City of Cleveland is running out of time. Now hard decisions—such as whether to cut off water service or pay a $30,000 delinquent water bill owed to Cleveland Municipal Water Department demonstrate the fiscal chaos in the city—and bring back recollections of one of the most difficult issues in Detroit’s municipal bankruptcy: how does a city balance insolvency against the public health and safety issues of water? In this instance, East Cleveland opted to pay most of the massive balanced owed, a bill for which prior nonpayment had caused Cleveland’s water department to shut down water service to some East Cleveland properties. Now East Cleveland Council President Thomas Wheeler reports the city is facing an additional one million dollar shortfall in 2017.