Fiscal & Service Solvency

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eBlog, 03/10/17

Good Morning! In this a.m.’s eBlog, we consider the long-term recovery of Chocolateville, or Central Falls, Rhode Island—one of the smallest municipalities in the nation; then we head West, even as no longer young, to consider the eroding fiscal situation confronting California’s CalPERS’ pension system, before, finally considering how Congress and the President, in trying to replace the Affordable Care Act, might impact Puerto Rico’s fiscal and service-related insolvency.

The Long & Exceptional Fiscal Road to Recovery. It was nearly five years ago that I sat with my class in a nearly empty City Hall in Central Falls, or Chocolateville, Rhode Island, the small (one square mile former mill town of indescribably delicious chocolate bars) with the newly appointed Judge Robert Flanders on his first day of the municipality’s chapter 9 municipal bankruptcy after his appointment by the Governor: a chapter 9 bankruptcy which that very same evening so sobered the City of Providence and its unions that their contemplation of filing for chapter 9 was squelched—and the State initiated its own unique sharing commitment to create teams of city managers, state legislators and others to act as intervention advisory teams so that no other municipality in the state would fall into insolvency. Our visit also led to our publication of a Financial Crisis Toolkit, which we promptly shared with municipal leaders across the State of Michigan at the Michigan Municipal League’s annual meeting in Detroit.
Today, it is Mayor James Diossa who has earned such deserved credit for what he describes as the “efforts and dedication to following fiscally sound budgeting practices,” efforts which, he said, “are clearly paying off, leaving the city in a strong position.” In the school of municipal finance, those efforts were rewarded with the credit rating elevation in its long-term general obligation rating three notches to BBB from BB, with credit analyst Victor Medeiros describing the fiscal recovery as one where, today, the city is “operating under a much stronger economic and management environment since emerging from bankruptcy in 2012…The city has had several years of strong budgetary performance, and has fully adhered to the established post-bankruptcy plan….The positive outlook reflects the possibility that strong budgetary performance could lead to improved reserves in line with the city’s new formal reserve policy.” The credit rating agency added that the city’s fiscal leadership had succeeded in ensuring strong liquidity, assessing total available cash at 28.7% of total governmental fund expenditures and nearly twice governmental debt service, leading S&P to award it a “strong institutional framework score.” That score should augur well as the city seeks to exit state oversight a year from next month: a path which S&P noted could continue to improve if it can build and sustain its gains in reserves and adhere to its successful financial practices, particularly after the city exits state oversight, or, as S&P put it: “Improving reserves over time would suggest that the city can position itself to better respond to the revenue effects of the next recession,” noting, however, the exceptional fiscal challenge in the state’s poorest municipality.

 

How Does a Public Pension System Protect against Insolvency? In California, the Solomon’s Choice awaits: what does CalPERS do when retiree of one of its members is from a municipality which has not paid in? In this case, one example is a retiree of a human services consortium which had closed with nearly half a million dollars in arrears to CalPERS. The conundrum: what is fair to the employee/retiree who fully paid in, but whose government or governmental agency had not? Or, as Michael Coleman, fiscal policy adviser for the League of California Cities, puts it: “Unless something is done to stem the mounting costs or to find ways to fund those mounting costs for employees, then the only recourse, beyond reducing service levels to unsustainable levels, is going to be to cut benefits for retirees,” an action which occurred for the first time last year, when CalPERS took such action against the tiny City of Loyalton, a municipality originally known as Smith’s Neck, but a name which the city fathers changed during Civil War—incorporated in 1901 as a dry town, its size was set at 50.6 square miles: it was California’s second largest city after Los Angeles. Today, Loyalton, the only incorporated city in Sierra County, helps us to grasp what can happen to public pension promises when there are insufficient resources: what will give? The answer, as Richard Costigan, Chair of CalPERS’ finance and administration committee puts it: “We end up being the bad person, because if the payments aren’t coming in, we’re left with the obligation to reduce the benefit, as we did in Loyalton…Otherwise the rest of the people in the system who have paid their bills would be paying for that responsibility.”
As all, except readers of this blog, are getting older (and, hopefully, wiser), cities, counties, states, and other municipal entities confront longer lifespans, so that, similar to the fiscal chasm looming in California, the day could be looming that what was promised thirty years ago is not fiscally available. In the Golden State, CalPERS has been paying benefits out faster that it has been gathering them, leading, at the end of last year, the state agency to reduce the assumed return on its investments to 7 percent from 7.5 percent—an action which, in turn, will requisition higher annual contributions from municipal and county governments, actions mandated by its fiduciary responsibility. While the state agency does not negotiate or set benefits, it does manage them on behalf of local governments, most of which are fulfilling their obligations.

 

Unpromising Turn. The PROMESA oversight board, deeming Puerto Rico’s liquidity to be critically low, has demanded the U.S. territory immediately adopt emergency spending cuts, writing to Gov. Ricardo Rosselló in an epistle that unless the government immediately adopted emergency measures, it could be insolvent in a “matter of months,” suggesting the government consider the immediate implementation of furloughs of most executive branch employees for four days each month, and teachers and other emergency personnel positions, such as law enforcement, two days a month; the Board urged Puerto Rico to put in place comparable furlough measures in other government entities, such as public corporations, authorities, and the legislative and judicial branches, in addition to recommending cutting spending for professional service contract expenditures by half. In addition, threatening public service solvency, the PROMESA Board directed the reduction of healthcare costs by negotiating drug pricing and rate reductions for health plans and providers. Mayhap most, at least from a governing perspective, critically, the PROMESA the board called for the Fiscal Agency and Financial Advisory Administration to implement a new liquidity plan by immediately controlling all Puerto Rico government accounts and spending, writing: “Given Puerto Rico’s lack of normal capital market access and our need to focus on a sustainable restructuring of debt is neither practical nor prudent to address this cash shortfall with new short-term borrowing,” warning Puerto Rico could face a cash deficit of about $190 million by the start of the new fiscal year, and that the Employment Retirement System and the Teachers Retirement System funds will be insolvent by the end of the calendar year. Adding to the threatening fiscal situation, Puerto Rico anticipates the loss of some $800 million in Affordable Care Act funding in the coming fiscal year.

 

Doctor Needed. As the U.S. House of Representatives reported out of two committees, yesterday, legislation to partially replace the Affordable Care Act, bills which, as introduced by the House Republicans—with the blessing of the Trump White House, omitted Puerto Rico, raising the specter that Congress could also fail to fund the U.S. territory’s Children’s Health Insurance Program, omissions Gov. Rosselló’s representative in Washington, D.C. warned might have implications threatening the reauthorization of the Children’s Health Insurance Program (CHIP), which could happen this summer, attributing  Puerto Rico’s exclusion from the two initial bills seeking to repeal and replace Obamacare—the first aimed at granting tax credits instead of direct subsidies, and the other which seeks to convert Medicaid in the states into a plan of block grants, like in the Island—to its colonial status: “As a territory, Puerto Rico isn’t automatically included in health reform legislation. It already happened with Obamacare. The Republican plan is a reform bill for the 50 states.” Indeed, Governor Rosselló’s fiscal plan complied with the PROMESA Oversight Board’s mandate to exclude any extensions of the nearly $1.2 billion in Medicaid funds currently granted under the Affordable Care Act, funds which could be depleted by the end of this year—and without any explanation for such clear discrimination against U.S. citizens.

Fiscal & Public Service Insolvency

eBlog, 03/03/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing challenges for the historic municipality of Petersburg, Virginia as it seeks to depart from insolvency; we consider, anew, the issues related to “service insolvency,” especially assisted by the exceptional insights of Marc Pfeiffer at Rutgers, then turning to the new fiscal plan by the Puerto Rico Fiscal Agency and Financial Advisory Authority, before racing back to Virginia for a swing on insolvent links. For readers who missed it, we commend the eBlog earlier this week in which we admired the recent wisdom on fiscal disparities by the ever remarkable Bo Zhao of the Federal Reserve Bank of Boston with regard to municipal fiscal disparities.

Selling One’s City. Petersburg, Virginia, the small, historic, and basically insolvent municipality under quasi state control is now trying to get hundreds of properties owned by the city off the books and back on the tax rolls as part of its effort to help resolve its fiscal and trust insolvency. As Michelle Peters, Economic Development Director for Petersburg, notes: “The city owns over 200 properties, but today we had a showcase to feature about 25 properties that we group together based on location, and these properties are already zoned appropriate for commercial development.” Thus the municipality is not only looking to raise revenues from the sale, but also to realize revenues through the conversion of these empty properties into thriving businesses—or as Ms. Peters puts it: “It’s to get the properties back on the tax rolls for the city, because, currently, the city owns them so they are just vacant, there are no taxes being collected,” much less jobs being filled. Ms. Peters notes that while some of the buildings do need work, like an old hotel on Tabb Street, the city stands ready to offer a great deal on great property, and it is ready to make a deal and has incentives to offer:  “We’re ready to sit down at the table and to negotiate, strike a deal and get those properties developed.”

New Jersey & Its Taken-over City. The $72 million tax settlement between Borgata Hotel Casino & Spa and Atlantic City’s state overseers is a “major step forward” in fixing the city’s finances, according to Moody’s Investors Service, which deemed the arrangement as one that has cleared “one of the biggest outstanding items of concern” in the municipality burdened by hundreds of millions of dollars in debt and under state control. Atlantic City owed Borgata $165 million in tax refunds after years of successful tax appeals by the casino, according to the state. The settlement is projected to save the city $93 million in potential debt—savings which amount to a 22 percent reduction of the city’s $424 million total debt, according to Moody’s, albeit, as Moody’s noted: “[W]hile it does not solve the city’s problems, the settlement makes addressing those problems considerably more likely.” The city will bond for the $72 million through New Jersey’s state Municipal Qualified Bond Act, making it a double whammy: because the bonds will be issued via the state MQBA, they will carry an A3 rating, ergo at a much better rate than under the city’s Caa3 junk bond status. Nevertheless, according to the characteristically moody Moody’s, Atlantic City’s finances remain in a “perilous state,” with the credit rating agency citing low cash flow and an economy still heavily dependent upon gambling.

Fiscal & Public Service Insolvency. One of my most admired colleagues in the arena of municipal fiscal distress, Marc Pfeiffer, Senior Policy Fellow and Assistant Director of the Bloustein Local Government Research Center in New Jersey, notes that a new twist on the legal concept of municipal insolvency could change how some financially troubled local governments seek permission to file for federal bankruptcy protection. Writing that municipal insolvency traditionally means a city, county, or other government cannot pay its bills, and can lead in rare instances to a Chapter 9 bankruptcy filing or some other remedy authorized by the state that is not as drastic as a Chapter 9, he notes that, in recent years, the description of “insolvency” has expanded beyond a simple cash shortage to include “service-delivery insolvency,” meaning a municipality is facing a crisis in managing police, fire, ambulance, trash, sewer and other essential safety and health services, adding that service insolvency contributed to Stockton, California, and Detroit filings for Chapter 9 bankruptcy protection in 2012 and 2013, respectively: “Neither city could pay its unsustainable debts, but officials’ failure to curb violent crime, spreading blight and decaying infrastructure was even more compelling to the federal bankruptcy judges who decided that Stockton and Detroit were eligible to file for Chapter 9.”

In fact, in meeting with Kevyn Orr, the emergency manager appointed by Michigan Governor Rick Snyder, at his first meeting in Detroit, Mr. Orr recounted to me that his very first actions had been to email every employee of the city to ensure they reported to work that morning, noting the critical responsibility to ensure that street lights and traffic lights, as well as other essential public services operated. He wanted to ensure there would be no disruption of such essential services—a concern clearly shared by the eventual overseer of the city’s historic chapter 9 municipal bankruptcy, now retired U.S. Bankruptcy Judge Steven Rhodes, who, in his decision affirming the city’s plan of debt adjustment, had written: “It is the city’s service delivery insolvency that the court finds most strikingly disturbing in this case…It is inhumane and intolerable, and it must be fixed.” Similarly, his colleague, U.S. Bankruptcy Judge Christopher Klein, who presided over Stockton’s chapter 9 trial in California, had noted that without the “muscle” of municipal bankruptcy protection, “It is apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic public services.” Indeed, in an interview, Judge Rhodes said that while Detroit officials had provided ample evidence of cash and budget insolvency, “the concept of service delivery insolvency put a more understanding face on what otherwise was just plain numbers.” It then became clear, he said, that the only solution for Detroit—as well as any insolvent municipality—was “fresh money,” including hundreds of millions of dollars contributed by the state, city, and private foundations: “It is a rare insolvency situation—corporate or municipal—that can be fixed just by a change in management.”

Thus, Mr. Pfeiffer writes that “Demonstrating that services are dysfunctional could strengthen a local government’s ability to convince a [federal bankruptcy] judge that the city is eligible for chapter 9 municipal bankruptcy protection (provided, of course, said municipality is in one the eighteen states which authorize such filings). Or, as Genevieve Nolan, a vice president and senior analyst at Moody’s Investors Service, notes: “With their cases focusing on not just a government’s ability to pay its debts, but also an ability to provide basic services to residents, Stockton and Detroit opened a path for future municipal bankruptcies.”

Mr. Pfeiffer notes that East Cleveland, Ohio, was the first city to invoke service insolvency after Detroit. In its so far patently unsuccessful efforts to obtain authority from the State of Ohio to file for municipal bankruptcy protection—in a city, where, as we have noted on numerous occasions, the city has demonstrated a fiscal inability to sustain basic police, fire, EMS, or trash services. East Cleveland had an approved plan to balance its budget, but then-Mayor Gary Norton told the state the proposed cuts “[would] have the effect of decimating our safety forces.” Ohio state officials initially rejected the municipality’s request for permission to file for municipal bankruptcy, because the request came from the mayor instead of the city council; the city’s status has been frozen since then.

Mr. Pfeiffer then writes:

Of concern.  [Municipal] Bankruptcy was historically seen as the worst case scenario with severe penalties – in theory the threat of it would prevent local officials from doing irresponsible things. [Indeed, when I first began my redoubtable quest with the Dean of chapter 9 municipal bankruptcy Jim Spiotto, while at the National League of Cities, the very idea that the nation’s largest organization representing elected municipal leaders would advocate for amending federal laws so that cities, counties, and other municipal districts could file for such protection drew approbation, to say the least.] Local officials are subject to such political pressures that there needs to be a societal “worst case” that needs to be avoided.  It’s not like a business bankruptcy where assets get sold and equity holders lose investment.  We are dealing with public assets and the public, though charged with for electing responsible representatives, who or which can’t be held fully responsible for what may be foolish, inept, corrupt, or criminal actions by their officials. Thus municipal bankruptcy, rather than dissolution, was a worst case scenario whose impact needed to be avoided at all costs. Lacking a worst case scenario with real meaning, officials may be more prone to take fiscal or political risks if they think the penalty is not that harsh. The current commercial practice of a structured bankruptcy, which is commonly used (and effectively used in Detroit and eventually in San Bernardino and other places) could become common place. If insolvency were extended to “service delivery,” and if it becomes relatively painless, decision-making/political risk is lowered, and political officials can take greater risks with less regard to the consequences. In my view, the impact of bankruptcy needs to be so onerous that elected officials will strive to avoid it and avoid decisions that may look good for short-term but have negative impact in the medium to long-term and could lead to serious consequences. State leaders also need to protect their citizens with controls and oversight to prevent outliers from taking place, and stepping in when signs of fiscal weakness appear.”

Self-Determination. Puerto Rico Gov. Ricardo Rosselló has submitted a 10-year fiscal plan to the PROMESA Oversight Board which would allow for annual debt payments of about 18% to 41% of debt due—a plan which anticipates sufficient cash flow in FY2018 to pay 17.6% of the government’s debt service. In the subsequent eight years, under the plan, the government would pay between 30% and 41% per year. The plan, according to the Governor, is based upon strategic fiscal imperatives, including restoring credibility with all stakeholders through transparent, supportable financial information and honoring the U.S. territory’s obligations in accordance with the Constitution of Puerto Rico; reducing the complexity and inefficiency of government to deliver essential services in a cost-effective manner; implementing reforms to improve Puerto Rico’s competitiveness and reduce the cost of doing business; ensuring that economic development processes are effective and aligned to incentivize the necessary investments to promote economic growth and job creation; protecting the most vulnerable segments of our society and transforming our public pensions system; and consensually renegotiating and restructuring debt obligations through Title VI of PROMESA. The plan he proposed, marvelously on the 100th anniversary of the Jones-Shafroth Act making Puerto Rico a U.S. territory, also proposes monitoring liquidity and managing anticipated shortfalls in current forecast, and achieving fiscal balance by 2019 and maintaining fiscal stability with balanced budgets thereafter (through 2027 and beyond). The Governor notes the Fiscal Plan is intended to achieve its objectives through fiscal reform measures, strategic reform initiatives, and financial control reforms, including fiscal reform measures that would reduce Puerto Rico’s decade-long financing gap by $33.3 billion through:

  • revenue enhancements achieved via tax reform and compliance enhancement strategies;
  • government right-sizing and subsidy reductions;
  • more efficient delivery of healthcare services;
  • public pension reform;
  • structural reform initiatives intended to provide the tools to significantly increase Puerto Rico’s capacity to grow its economy;
  • improving ease of business activity;
  • capital efficiency;
  • energy [utility] reform;
  • financial control reforms focused on enhanced transparency, controls, and accountability of budgeting, procurement, and disbursement processes.

The new Fiscal Plan marks an effort to achieve fiscal solvency and long-term economic growth and to comply with the 14 statutory requirements established by Congress’ PROMESA legislation, as well as the five principles established by the PROMESA Oversight Board, and intended to sets a fiscal path to making available to the public and creditor constituents financial information which has been long overdue, noting that upon the Oversight Board’s certification of those fiscal plans it deems to be compliant with PROMESA, the Puerto Rico government and its advisors will promptly convene meetings with organized bondholder groups, insurers, union, local interest business groups, public advocacy groups and municipality representative leaders to discuss and answer all pertinent questions concerning the fiscal plan and to provide additional and necessary momentum as appropriate, noting the intention and preference of the government is to conduct “good-faith” negotiations with creditors to achieve restructuring “voluntary agreements” in the manner and method provided for under the provisions of Title VI of PROMESA.

Related to the service insolvency issues we discussed [above] this early, snowy a.m., Gov. Rosselló added that these figures are for government debt proper—not the debt of issuers of the public corporations (excepting the Highways and Transportation Authority), Puerto Rico’s 88 municipalities, or the territory’s handful of other semi-autonomous authorities, and that its provisions do not count on Congress to restore Affordable Care Act funding. Rather, Gov. Rosselló said he plans to determine the amount of debt the Commonwealth will pay by first determining the sums needed for (related to what Mr. Pfeiffer raised above] “essential services and contingency reserves.” The Governor noted that Puerto Rico’s debt burden will be based on net cash available, and that, if possible, he hopes to be able to use a consensual process under Title VI of PROMESA to decide on the new debt service schedules. [PROMESA requires the creation of certified five-year fiscal plan which would provide a balanced budget to the Commonwealth, restore access to the capital markets, fund essential public services, and pensions, and achieve a sustainable debt burden—all provisions which the board could accept, modify, or completely redo.]  

Adrift on the Fiscal Links? While this a.m.’s snow flurries likely precludes a golf outing, ACA Financial Guaranty Corp., a municipal bond insurer, appears ready to take a mighty swing for a birdie, as it is pressing for payback on the defaulted debt which was critical to the financing of Buena Vista, Virginia’s unprofitable municipal golf course, this time teeing the proverbial ball up in federal court. Buena Vista, a municipality nestled near the iconic Blue Ridge of some 2,547 households, and where the median income for a household in the city is in the range of $32,410, and the median income for a family was $39,449—and where only about 8.2 percent of families were below the poverty line, including 14.3 percent of those under age 18 and 10 percent of those age 65 or over. Teeing the fiscal issue up is the municipal debt arising from the issuance by the city and its Public Recreational Facilities Authority of some $9.2 million of lease-revenue municipal bonds insured by ACA twelve years ago—debt upon which the municipality had offered City Hall, police and court facilities, as well as its municipal championship golf course as collateral for the debt—that is, in this duffer’s case, municipal debt which the municipality’s leaders voted to stop repaying, as we have previously noted, in late 2015. Ergo, ACA is taking another swing at the city: it is seeking:

  • the appointment of a receiver appointed for the municipal facilities,
  • immediate payment of the debt, and
  • $525,000 in damages in a new in the U.S. District Court for Western Virginia,

Claiming the municipality “fraudulently induced” ACA to enter into the transaction by representing that the city had authority to enter the contracts. In response, the municipality’s attorney reports that Buena Vista city officials are still open to settlement negotiations, and are more than willing to negotiate—but that ACA has refused its offers. In a case where there appear to have been any number of mulligans, since it was first driven last June, teed off, as it were, in Buena Vista Circuit Court, where ACA sought a declaratory judgment against the Buena Vista and the Public Recreational Facilities Authority, seeking judicial determination with regard to the validity of its agreement with Buena Vista, including municipal bond documents detailing any legal authority to foreclose on city hall, the police department, and/or the municipal golf course. The trajectory of the course of the litigation, however, has not been down the center of the fairway: the lower court case took a severe hook into the fiscal rough when court documents filed by the city contended that the underlying municipal bond deal was void, because only four of the Buena Vista’s seven City Council members voted on the bond resolution, not to mention related agreements which included selling the city’s interest in its “public places.” Moreover, pulling out a driver, Buena Vista, in its filing, wrote that Virginia’s constitution filing, requires all seven council members to be present to vote on a matter which involved backing the golf course’s municipal bonds with an interest in facilities owned by the municipality. That drive indeed appeared to earn a birdie, as ACA then withdrew its state suit; however, it then filed in federal court, where, according to its attorney, it is not seeking to foreclose on Buena Vista’s municipal facilities; rather, in its new federal lawsuit, ACA avers that the tainted vote supposedly invalidating the municipality’s deed of trust supporting the municipal bonds and collateral does not make sense, maintaining in its filing that Buena Vista’s elected leaders had adopted a bond resolution and made representations in the deed, the lease, the forbearance agreement, and in legal opinions which supported the validity of the Council’s actions, writing: “Fundamental principles of equity, waiver, estoppel, and good conscience will not allow the city–after receiving the benefits of the [municipal] bonds and its related transactions–to now disavow the validity of the same city deed of trust that it and its counsel repeatedly acknowledged in writing to be fully valid, binding and enforceable.” Thus, the suit requests a judgment against Buena Vista, declaring the financing documents to be valid, appointing a receiver, and an order granting ACA the right to foreclose on the Buena Vista’s government complex in addition to compensatory damages, with a number of the counts seeking rulings determining that Buena Vista and the authority breached deed and forbearance agreements, in addition to an implied covenant of good faith and fair dealing, requiring immediate payback on the outstanding bonds, writing: “Defendants’ false statements and omissions were made recklessly and constituted willful and wanton disregard.” In addition to compensatory damages and pre-and post-judgment interest, ACA has asked the U.S. court to order that Buena Vista pay all of its costs and attorneys’ fees; it is also seeking an order compelling the city to move its courthouse to other facilities and make improvements at the existing courthouse, including bringing it up to standards required by the ADA.

Like a severe hook, the city’s municipal public course appears to have been errant from the get-go: it has never turned a profit for Buena Vista; rather it has required general fund subsidies totaling $5.6 million since opening, according to the city’s CAFR. Worse, Buena Vista notes that the taxpayer subsidies have taken a toll on its budget concurrent with the ravages created by the great recession: in 2010, Buena Vista entered a five-year forbearance agreement in which ACA agreed to make bond payments for five years; however, three years ago, the city council voted in its budget not to appropriate the funds to resume payment on the debt, marking the first default on the municipal golf course bond, per material event notices posted on the MSRB’s EMMA.

Governance Insolvency?

eBlog, 2/10/17

Good Morning! In this a.m.’s eBlog, we consider an increasing governance insolvency in Petersburg, Virginia—a virtually fiscally insolvent municipality, Michigan Governor Rick Snyder’s request to the Michigan legislature for an additional $48 million for the City of Flint, and the efforts of Puerto Rico to adjust itself to the new administration and Congress in Washington, D.C.

Governance Insolvency? Petersburg, Virginia City Council members, at the first council meeting since residents had petitioned a court to remove the Mayor and a Councilmember from office, were confronted with copies of “Robert’s Rules of Order,” and an organizational chart explaining that the voters are in charge. Nonetheless, that was insufficient to prevent the Council from suspending its own rules over complaints from its own members and city residents to allow for a vote to permit the use of taxpayers’ dollars for the hiring of a private lawyer to defend Mayor Samuel Parham and Councilman W. Howard Myers from removal petitions. The move appeared to further inflame tensions between Petersburg’s governing body and the community it serves at a time when the Council has come under fire from good-government advocates and the ACLU of Virginia. The vote followed a brief recess called after Petersburg resident Ron Flock requested to learn when the Council had (publicly) voted to hire an attorney to defend Mayor Parham and Councilmember Myers, noting: “There should be no reason why (the City Attorney) cannot represent the defendants in this hearing…At what point did you as City Council approve this expenditure?” The query came in the wake, at the beginning of this week, of Richmond attorney, James Cornwell, appearing in court to defend the Mayor and Councilmember against allegations of “neglect, misuse of office, and incompetence” that voters from their respective wards had lodged in January in Petersburg Circuit Court. Councilmember Wilson-Smith noted: “This resolution does not say how much this is costing and where the money is coming from, and I would like to know that,” with regard to the proposed resolution in advance of her vote in opposition. Neither the Mayor nor Councilmember recused themselves from voting: each voted on the measure over the dissent of audience members, who at first murmured, then hooted their disapproval at their decision not to recuse themselves from the vote. The petitioners who are seeking to oust the two elected officials have supported their ouster in large part because of their perceptions about not only their roles in the city’s collapse into insolvency, but also allegations with regard to their ethical breaches and violations of open-government law. (Virginia statutes allow for the removal of elected officials for specific reasons, which include certain criminal convictions.)

City Council Ethics, Conduct, & Insolvency. The kerfuffle came as Robert Bobb, the former Richmond City Manager, whom the city hired last October to help address its insolvency, unveiled proposed revisions to the City Council’s rules, including provisions for Councilmembers’ conduct and a detailed explanation of state laws on open records. Mr. Bobb spent time on how those laws applied to public meetings, an issue identified by the ACLU of Virginia last November in an epistle sharply critical of Council practices which the ACLU wrote violated “the spirit of open-government laws.” Mr. Bobb also formally named Joseph Preston, whom the city had retained last October as the new City Attorney, as Petersburg’s official parliamentarian. (In fact, it was in October that Mr. Preston had defended a Council vote to hire the Bobb Group that several registered parliamentarians then said appeared to be in violation of both the Council’s rules at the time and Petersburg’s charter.) Mr. Preston told the Mayor and Council it was too soon to estimate what the cost to the city’s budget and taxpayers would be to defend that Mayor and Councilmember—with the case to commence before Petersburg Circuit Judge Joseph M. Teefey Jr. next week.

Not in like Flint. State of Michigan officials have decided to end the state-funded water subsidies which, since 2014, had helped Flint residents—a city where more than 40 percent of the residents live below the federal poverty level—and where the median household income is $24,862—pay their water bills after the city’s water system became contaminated with lead due to decisions and actions taken by Gov. Rick Snyder’s former appointed Emergency Manager. Word of the abrupt state cutoff spread yesterday in the wake of a senior advisor to the Governor sending a letter to the city’s interim chief financial officer, David Sabuda, that the state credits, which applied to the water portion of Flint utility customers’ accounts, would end at the end of this month: the March billing statement will be the last to include the water usage credits, which were 20 percent for commercial customers and 65 percent for residential. In addition, the state will also no longer provide $1.2 million in monthly funding for the water the city receives from the Great Lakes Water Authority. Flint Mayor Karen Weaver issued a statement expressing concern at the manner and abruptness of the state’s action; nevertheless, she described it as a welcome sign that the city’s water is improving. The Governor’s decision comes after, last December, charges were filed against two of Gov. Snyder’s former appointed state emergency managers for the city—they were accused of misleading the Michigan Department of Treasury into issuing millions in municipal bonds, but then misused the proceeds to finance the construction of a new pipeline and force Flint’s drinking water source to be switched to the contaminated Flint River. The decision also came just ten days after the filing of a $722 million class action lawsuit against the EPA on behalf of more than 1,700 residents impacted by the water crisis. In response to the abrupt state cutoff, however, Mayor Weaver described the Governor’s action as a sign that the city’s water quality had improved—albeit stopping short of saying it was entirely safe: “I am aware that the water quality in the City of Flint is improving and that is a good thing…We knew the state’s assistance with these water-related expenses would come to an end at some point. I just wish we were given more notice so we at City Hall, and the residents, had more time to prepare for the changes.”

Federalism, Governance, & Hegemony. Former Puerto Rico Governor Anibal Acevedo Vilá yesterday brought a message from the Popular Democratic Party (PDP) to U.S. Senate leaders, saying that the New Progressive Party has legislated “another rigged status consultation” to fabricate a majority in favor of statehood, meeting with Sen. Roger Wicker (R-Miss.), an old ally of his collective, and advisors of the Chair Lisa Murkowski (R-Alaska), Chair of the Senate Environment and Natural Resources Committee and Sen. Maria Cantwell (D-Washington). The apparent intention was to begin to build a relationship with Jeff Sessions, whom the U.S. Senate yesterday confirmed as the new U.S. Attorney General. It would be in his newly confirmed capacity that the Attorney General would be in a position to approve a plebiscite’s ballot definitions and educational campaign between statehood and political sovereignty (free association or independence), which the NPP Government has set for this coming June 11th. Mr. Acevedo Vilá noted that by excluding a Commonwealth definition from the consultation, be it sovereign or developed, “a very high percentage of the Puerto Rican population” has been excluded. The former Governor of the U.S. territory is pursuing the presidency of his party; he will face former Representative Héctor Ferrer by the end of the month. He was accompanied by a delegation of legislators from his party, such as Luis Vega Ramos and Brenda López de Arrarás, who have also had their own meetings with Members of Congress concerning status, healthcare, and federal tax incentives for investment in Puerto Rico.

The meetings came as the PROMESA Puerto Rico Oversight Board fired off two letters this month asserting its authority over Puerto Rico’s legislature as its effort to oversee the island’s economy and address the debt crisis have, unsurprisingly, encountered resistance from Puerto Rico’s elected officials. Last week, the PROMESA Board sent a letter to the governor’s representative on the board, Elías Sánchez, asserting that it has many ways it can control the legislature even though Puerto Rico has yet to adopt a fiscal plan, pointing to §207 and §303 of the Puerto Rico Oversight, Management and Economic Stability Act, which address the board’s oversight of the government’s handling of debt. In addition, the board noted §204(a)(1)-(2), which states, “Except to the extent that the oversight board may provide otherwise in its bylaws, rules, and procedures, not later than seven business days after a territorial government duly enacts any law during any fiscal year in which the oversight board is in operation, the Governor shall submit the law to the oversight board.” The federal law adds that such submission is supposed to be accompanied by an independent entity’s estimate of the law’s cost: if the board finds the law inconsistent with the fiscal plan, the board can ask for it to be corrected or blocked. In the PROMESA Board’s epistle of last week, the letter notes that its review of the laws “is independent of the existence of a certified fiscal plan.” Since this PROMESA section is titled “Review of activities to ensure compliance with fiscal plan,” however, this is unclear.

The issue arose even as, this week, the PROMESA Board fired off another missive stating: “We believe that all government entities need to do the utmost to reduce expenses, including those relating to professional service contracts, as soon as possible and as much as possible,” noting the board “is currently focused on the goal of certifying a ten-year fiscal plan for Puerto Rico.” (Puerto Rico Gov. Ricardo Rosselló is supposed to submit a proposed fiscal plan covering government revenues and spending by February 21st—while the PROMESA Board has set a March 15th deadline to certify the plan. Yet the nature of the U.S. hegemony remains at issue: Puerto Rico’s Senate President Thomas Rivera Schatz has threatened to sue the Oversight Board if it attempts to exercise authority over the legislature, according to the El Vocero news website.  

 

 

Federalism & Fiscal Challenges

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eBlog, 2/07/17

Good Morning! In this a.m.’s eBlog, we consider some of the implications of New Jersey’s constitution with regard to the state’s takeover of Atlantic City: does the state takeover violate parts of the Garden State’s constitution? Then we head south to the Caribbean to try to understand the extraordinary fiscal challenges to the neighboring U.S. territories of Puerto Rico and the U.S. Virgin Islands.

New Jersey Federalism? New Jersey Superior Court Judge Julio Mendez has issued an order temporarily blocking the state’s effort to eliminate one hundred Atlantic City firefighter positions—all part of an order which momentarily halts the state from imposing any layoffs or unilateral contract changes to Atlantic City’s 225-member fire department. The issue and legal challenge here arose in the wake of the International Association of Fire Fighters, Local 198, and the AFL-CIO filing a lawsuit arguing that the State of New Jersey’s action under the Municipal Stabilization and Recovery Act—which empowered the state takeover of the City, and authorized New Jersey’s Local Finance Board to take over the city, violates New Jersey’s constitution. The suit comes even as the state’s Department of Community Affairs claims the state had already decided before the ruling to push back implementing the firefighter cuts until next September—with the changes to pay structure, hours, and overtime postponed until the end of next week; however, the state made clear the “temporary restraining order signed by Judge Mendez does not change the State’s timetable for advancing reforms of Atlantic City firefighters’ contracts…We decided to delay implementing the proposed contract reforms until February 19th as a good faith gesture to give the fire department more time to prepare.”

Judge Mendez had initially scheduled a hearing for next Monday; however, the state successfully fought to get the case removed to federal court at an undetermined date. Judge Mendez issued the restraining order despite the state, in a court filing, advising the court it would hold off implementing the proposed 100 layoffs until September, and would delay changes to pay structure, hours, overtime, and benefits until February 19th. However, Judge Mendez’s order bars the state from taking any action under the Municipal Stabilization and Recovery Act that is “in violation of the Due Process and Equal Protection, Contracts, Takings, Collective Negotiation, and Civil Service clauses of the New Jersey Constitution.” The case marks the first legal challenge to the broad state preemption and takeover of Atlantic City imposed by the state last November: the subsequent court case could shape up to be a significant test of the takeover’s constitutionality against criticisms that it violates residents’ civil rights and the collective bargaining rights of the city’s unions.

The state’s strategy in responding by seeking removal to the federal court seems exceptional—and in stark contrast to the unique concept of dual federalism in this country, especially so in this case, because the New Jersey constitution includes a comparable provision with regard to voiding contracts—or, as a colleague late last night noted: “It’s odd for a state law to be appealed to the federal court when there are state constitutional issues at stake.” Nevertheless, the filing raises two issues: 1) would a federal court even consent? It is, after all, a matter of New Jersey law, and 2) it would seem, especially in a New Jersey court, that the state constitution issue should supersede a federal action.  

At the same time, in a separate fiscal arena, Moody’s Investor Service’s affirmed  Atlantic City’s deep-junk level Caa3 bond rating and retained the city’s negative outlook, citing an ongoing “liquidity crisis” and likely default in the next year notwithstanding the state’s takeover—the city, after all, is confronting a structural deficit of more than $100 million and has suffered five casino closures since 2014; it has $240 million in municipal bond debt and more than $500 million in total debt when factoring in casino tax refunds and other obligations. It would seem Moody’s is seeking to ensure investors are aware of what is transpiring—and needed to remind the city’s municipal bondholders that there will be a new Governor who will have to reassess what actions—and relationship with Atlantic City—they ought to consider.

Statehood I? Puerto Rico Gov. Ricardo Rosselló has signed into law a bill for a June referendum on Puerto Rico’s political status. The law provides for a non-binding referendum that would allow the U.S. territory to vote on statehood. The referendum, to be held this June, will allow the voters to choose between statehood and independence/free association. Those in support of Puerto Rican statehood believe approving statehood could help the country restructure its $70 billion in public debt and stave off further federal austerity measures. Functionally, if approved, Puerto Rican statehood would allow the state to receive $10 billion in federal funds per year, as well as allowing government agencies and municipalities to file for chapter 9 municipal bankruptcy. In signing the legislation, Gov. Rosselló called the vote “a civil rights issue;” he said the U.S. will have to “respond to the demands of 3.5 million citizens seeking an absolute democracy.” Importantly, if granted statehood, the U.S. citizens of Puerto Rico would, at long last, no longer be denied many of the benefits provided to citizens in U.S. mainland and Hawaii, including equal access to Social Security and Medicare, despite paying taxes for these services. In addition, Puerto Rico’s representatives in Congress would be granted the same voting rights as all other Members of Congress—except for the Delegate from the District of Colombia. Under the referendum, voters would, in effect, determine whether to alter Puerto Rico’s status as a territory granted under the Jones-Shafroth Act: they will be asked if they support Puerto Rico becoming a state or a country independent of the United States of America. Should voters opt for independence, a subsequent referendum next October would be held to determine whether citizens wish to maintain some sort of association with the U.S., or become independent. In a written statement from Gov. Rosselló, Puerto Rico House of Representatives President Carlos Méndez said, “The colonial situation that currently defines Puerto Rico has deprived Puerto Ricans of participating fully in the federal government, of voting for the president of the United States, of electing representatives with a say and vote in the federal congress, and of receiving equal treatment in opportunities that strengthen socio-economic development and quality of life.”

Statehood or Independence? Even as Gov. Rosselló has signed into law a provision to allow Puerto Rico’s citizens to vote on their own governing destiny, Congressman Luis Gutiérrez (D-Puerto Rico) today plans to offer legislation in Congress to promote a federal plebiscite in which Puerto Ricans can select between independence and a free association pact between Puerto Rico and the United States, with a draft of his proposal, as reported by El Nuevo Día, stating: “The annexation of Puerto Rico as a state of the Union would be detrimental both to the United States and to Puerto Rico. It is time to return sovereignty to Puerto Rico…Statehood and full assimilation—in which Puerto Rico delivers its nationality, culture, Olympic team, language, and ability to determine its future—is not the only option and is not the best option for Puerto Ricans.” Under the proposed legislation, all Puerto Ricans or a father or mother born in Puerto Rico, would be granted the right to vote; rights granted via federal programs, such as veterans, pensions, and benefits from military service would be recognized. The proposal suggests a process to restructure public debt as well as an agreement to keep the current total of federal transfers, as a bloc, during a transitional period. The bill provides that citizenship of Puerto Rico would be recognized; however, Puerto Ricans would be eligible to retain U.S. citizenship.

Caribbean Fiscal Contagion? Fitch Ratings has lowered its credit ratings for the U.S. Virgin Islands, just seventeen miles from Puerto Rico, downgrading its ratings on about $216 million of the U.S. territory’s water and power authority municipal bonds—acting in the wake of the island government’s rescission of a utility rate increase which had been approved last month. Fitch’s action put the island’s ratings eight levels below investment grade—and near default, and came in the wake, last month, of its downgrade of the Virgin Islands’ public finance authority, which borrows on behalf of the government, writing: “The rating downgrade reflects the heightened credit risk as a consequence of the island’s Water & Power Authority’s continued inability to gain regulatory approval of rate relief needed to address its exceptionally weak cash flow and liquidity.” The downgrade came in the wake of the U.S. territory’s increasing inability to issue municipal debt: the government has been unable to issue municipal debt since December, twice delaying a planned $219 million municipal bond sale. The U.S. territory, confronted by budget shortfalls, had intended to use the bond proceeds to help cover the government’s bills. Virgin Islands Governor Kenneth Mapp has proposed a series of tax increases intended to bolster the territory’s finances and restoring its access to the financial markets. However, as the Romans used to say: tempus fugit: Last week, Gov. Mapp warned the government may not be able to make payroll by the middle of this month if nothing is done.

How Does a Leader Balance Fiscal Versus Human Health & Safety?

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eBlog, 1/24/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and human health and safety challenges—and fiscal implications—in the City of Flint, as city residents have sued the State of Michigan; then we look east to Ohio, where the question with regard to a similar human and fiscal health related to East Cleveland appears to be worsening with regard to health, fiscal health, and governance. Finally, we peer south to the warm Caribbean, but where the warmth in weather is exceeded by the increasing political heat between the PROMESA oversight board and the new Governor—a challenge with parallels to the fiscal struggle Washington, D.C. underwent nearly two decades ago.

Fighting for Flint’s Fiscal Future. U.S. District Judge David Lawson has described an attempt by Michigan Attorney General Bill Schuette to side with Flint residents in a lawsuit against the state as “superficial posturing,” stating that the AG has created a “troubling ethical issue” that could delay the case that seeks to provide the city with bottled water delivery. In his opinion, Judge Lawson denied Mr. Schuette’s request to file an amicus brief in the case on behalf of “the people of the State of Michigan,” saying the motion is problematic for several reasons, including that assistant attorneys general have already appeared in the case on behalf of state defendants, including Gov. Rick Snyder, writing: “The proposed amicus brief has not introduced any new arguments or offered a perspective that has not been presented by the parties already. Instead, the attorney general has taken a position aligned with the plaintiffs and at odds with other attorneys in his own office…In doing so, he has managed to inject a troubling ethical issue into this lawsuit, potentially complicating adjudication of the serious legal questions before the court, without adding anything of substance.” A spokesperson for the Michigan Attorney General said he would not appeal this ruling, noting that while the attorney general respectfully disagreed with the ruling, “We originally obtained concurrence from all parties prior to filing, and because it failed to include mention of the conflict wall in this case…Attorney General Schuette will continue to fight aggressively for Flint families and remains thankful to the many Flint residents and elected officials who expressed their support of his actions.” The denial came the day before Judge Lawson is to take up an emergency motion in the case: today, Judge Lawson must decide whether and how the State of Michigan and both state and Flint officials should—or must—comply with a largely ignored federal court order requiring door-to-door delivery of bottled water to Flint homes lacking a working water filter.

The legal challenge dates back to last November, when Judge Lawson ordered the state and City of Flint to provide and finance the provision of four cases of bottled water per resident per week if officials cannot prove faucet filters are working to remove harmful lead. That was an order Gov. Snyder’s administration opposed, arguing it is “overbroad,” and one which the city is fiscally unable to meet; indeed, Michigan has filed an emergency motion with the U.S. Sixth Circuit Court of Appeals to block the order, arguing before the court that while the state was not “reluctant “to comply with the order, rather it was confronted by “financial, logistical, and practical difficulties” in doing so. According to state officials, the order would be a five-fold increase over current efforts and require another 137 trucks, hiring at least 150 additional people and “a warehouse so large it is not clear if one even exists in the Flint area” at a cost of more than $11 million per month. In his order at the beginning of last month, Judge Lawson wrote: “The main thrust of the ordered relief is the proper installation and maintenance of tap water filters. For those homes that have properly installed and maintained water filters in place—which is the vast majority of residences, if the state defendants’ witnesses are to be believed—bottled water delivery is not necessary and was not ordered.” While testing shows lead levels in Flint water are on the decline, Flint residents have been instructed to use only filtered or bottled water for consumption, and researchers have encouraged those practices until further notice from state or federal officials: no amount of lead is considered safe.

Does East Cleveland Have a Future? Ohio’s Environmental Protection agency has shut down a waste site in East Cleveland which currently holds an estimated 2 million yards of waste and construction debris, piled up over the past few years by Arco Recycling, declaring it an unpermitted landfill. In the nonce, former East Cleveland Mayor Eric Brewer worked with Auburn Environmental to understand the harm which might already have occurred at a site which features a combination of toxic gas and toxic particles both on the outside and inside of the property—and which appears to have been operating without any legal authority granted by the municipality. The EPA has given Arco Recycling two weeks to clean up or face further actions. Given the small city’s fiscal depletion and insolvency—and the lack of any state response, it would almost appear to be another Flint-like situation, with grave implications for public health and safety, and a fiscal inability by the small city to address on its own—either fiscally or governmentally.

Is there Unpromise in PROMESA? According to Governor Ricardo Rosselló Nevares, it is time for the PROMESA Oversight Board created by the U.S. Congress and former Obama Administration to turn into Puerto Rico’s representative in Washington, D.C., because, otherwise, the various efforts coordinated to strike a fiscal balance and attain socioeconomic development in the U.S. territory will be in vain. The Governor was responding to a lengthy letter from the Board demanding austerity—a demand which appeared to reflect little flexibility with regard to demanding $4.5 billion in spending cuts and/or tax increases per year. While the PROMESA board said it was open with regard to how the Governor achieves that bottom line, the epistle noted: “To be clear, presenting a plan that can achieve at least this level of savings is a pre-requisite to certifying a fiscal plan.”

According to Governor Rosselló Nevares, the delicate state of the island’s public finances, as well as the grave risk of disruption to Puerto Rico’s healthcare services creates what he described as an “unambiguous need” to obtain the federal government’s support in overcoming the crisis, a message that pertains to his administration, but also the Oversight Board—or, as the Governor put it: “The Board has, I believe, that role to fulfill. They need to be the voice for Puerto Rico’s credibility, as did other fiscal boards, like the board in Washington, D.C…For two and a half years, the members of the board in Washington, D.C., using all available financial tools, but were unable to, failed, or attained only marginal improvements. Which is why they had to return to the Capitol to explain two huge faults they had found.” According to Governor Rosselló Nevares, the PROMESA legislation that ordained the oversight board lacked economic development tools critical to the island’s economy and future revenues, and, he added, as with the District of Columbia, where a comparable oversight body was created—that body went back to Congress to ask for fiscal support. But, in addition, the Governor noted, the second element the legislation for D.C. lacked was “equal treatment as a state.”

The Governor was referring to the period nearly three decades ago when the nation’s capitol, Washington, D.C., succumbed to a comparable fiscal crisis which resulted in credit downgrades and the city’s inability to pay its required pension contributions, all while experiencing disruption in public services. In response, Congress intervened by creating an entity similar to the Oversight Board, in 1997, via the National Capital Revitalization Act, a statute which allowed for the transfer of hundreds of programs funded by DC’s administration to the federal government. The act, among other things, had the federal government take over the criminal justice programs and the actuarial deficiencies in the pensions for teachers, police officers, firemen, and judges. In addition, the federal government also increased its contribution to the District’s Medicaid program, from 50% to 70%—changes which, Governor Rosselló Nevares noted, when made, provided for a nation’s capital city that “was able to thrive.” According to the Governor, under PROMESA, “We have a report from that group, which could presumably help our economic development, but it’s not binding and we don’t know what we’re going to do…The Board, like us, should be a spokesperson to our credibility, and they should tell those who put them there (Congress) that Puerto Rico is taking action, and we’re making good progress.” Although the Governor urged the board members to take up a position in favor of the U.S. territory, while PROMESA regulates the pension and public debt payments, the federal entity’s mandate is explicit: restoring fiscal discipline and achieving Puerto Rico’s return to the capital markets under reasonable conditions.

Consequently, Gov. Rosselló Nevares has focused on providing tools for the private sector, enabling the development of infrastructure projects, and ensuring the continuity of certain collections by approving the extension of Act 154 (which created the 4% tax on foreign companies); but he still counsels “there needs to be action from the federal government,” noting: “You may take fiscal measures to check them off the list, but without economic development, it would have a noxious effect, possibly on emigration, on the quality of life for citizens, and the social environment,” as he rejected the Financial Oversight and Management Board for Puerto Rico’s demands for quick and deep austerity measures, deriding the letter from the oversight board as one demanding an “average 79% haircut,” insisting, instead, “We will reflect a fundamental willingness to pay based upon available resources, while satisfying the need for essential services, adequate funding for public pensions and providing a platform for economic growth, all as required by [the Puerto Rico Oversight, Management and Economic Stability Act].”

Fighting for Cities’ Futures

eBlog, 1/23/17

Good Morning! In this a.m.’s eBlog, we consider the ongoing fiscal and governing challenge to Detroit’s future—especially with regard to the quality of education for the city’s future leaders; then we learn from one of the unsung heroes, retired U.S. Judge Gerald Rosen, about his reflections and role in Detroit’s exit from the largest municipal bankruptcy in American history. Then we return to the historic Virginia municipality of Petersburg, where, in its struggle to exit insolvency, a citizen effort is underway to recall its elected leaders. Finally, in the category of ‘when it rains it pours,’ we consider the city hall relocation underway in San Bernardino—one month before it hopes to gain U.S. Bankruptcy Judge Meredith Jury’s approval of the city’s plan of debt adjustment, permitting the city to egress from the longest municipal bankruptcy in American history.

Fighting for Detroit’s Fiscal Future. The City of Detroit is siding with seven Detroit public schoolchildren suing Gov. Rick Snyder and Michigan state education officials over their right to access literacy. (See Jessie v. Snyder, #16-CV-13292, U.S. District Court), having filed an amicus brief in a proposed class action lawsuit against Gov. Snyder and Michigan education officials in a legal challenge seeking to establish that literacy is a U.S. constitutional right. The suit, which was filed last September by a California public interest law firm, claims the state has functionally excluded Detroit children from the state’s educational system; the suit seeks class-action status and several guarantees of equal access to literacy, screening, intervention, a statewide accountability system, as well as other measures. Detroit’s amicus brief urged the court to hold access to literacy as being fundamental, arguing the plaintiffs have alleged sufficient facts to show they are being denied that right: “Denying children access to literacy today inevitably impedes tomorrow’s job seekers and taxpayers; fathers and mothers; citizens and voters…That is why the Supreme Court has stressed the ‘significant social costs borne by our nation’ when children suffer the ‘stigma of illiteracy’—and are thereby denied ‘the basic tools by which (to) lead economically productive lives to the benefit of us all…The City of Detroit (though it does not control Detroit’s schools) is all too familiar with illiteracy’s far-reaching effects.”

A critical fiscal issue for every city and county is the perceived quality of its public schools—a perception critical to encouraging families with children to move into the city—thereby positively affecting assessed property values. The challenge has been greater in Detroit, where the schools’ fiscal and educational insolvencies led to the appointment of former U.S. Bankruptcy Judge Steven Rhodes to serve as DPS’s Emergency Manager. In Detroit, politics at the state level imposing a disproportionate number of charter schools has meant that today Detroit has a greater share of students in charters than any U.S. city except New Orleans; however, half the charters perform only as well, or worse than, Detroit’s traditional public schools—mayhap a challenge of having a state attempt to substitute itself over local control. Perhaps former state representative Thomas F. Stallworth III, who helped navigate the passage of the 2014 legislation that paved Detroit’s way out of bankruptcy, put it more succinctly: “We’ll either invest in our own children and prepare them to fill these jobs, or I suppose maybe people will migrate from other places in the country to fill them…If that’s the case, we are still left with this underbelly of generational poverty with no clear path out.”

But, in Michigan, it appears that it has been for-profit companies that expressed the greatest interest: they now operate about 80 percent of charters in Michigan, far more than in any other state. In the wake of the state action, and even as Michigan and Detroit continued to preside over an exodus of families, the number of charter schools grew: Michigan today has nearly 220,000 fewer students than it did in 2003, but more than 100 new charter schools. The number not only grew, but the legislature made sure accountability did not: the legislature in 2012 repealed in the Revised School Code Act 451 the state’s longstanding requirement that the Michigan Department of Education issue annual reports monitoring charter school performance; and the state even created a state-run school district, with new charters, in an effort to try to turn around Detroit’s lowest performing schools. Indeed, 24 charter schools have opened in Detroit since the legislature removed the cap 2011: eighteen charters whose existing schools were at or below Detroit’s dismal performance expanded or opened new schools—that despite increasing evidence students in one company’s schools grew less academically than students in the neighboring traditional public schools. By 2015, the Education Trust-Midwest Michigan noted that charter school authorizers’ performance overall had improved marginally over the previous year, but remained terribly low compared to leading states’ charter sectors, in its report, Accountability for All: 2016, The Broken Promise of Michigan’s Charter Sector. The report celebrates high-performing authorizers and sheds light on the devastatingly low performance of other authorizers, adding that roughly one-quarter of one group’s eligible schools ranked among the worst performing 10 percent of schools statewide. Similarly, according to the Trust, a federal review of a grant application for Michigan charter schools found an “unreasonably high” number of charters among the worst-performing 5 percent of public schools statewide, even as the number of charters on the list had doubled from 2010 to 2014.

The great press to create charter schools has led to another challenge: today Detroit has roughly 30,000 more seats, charter and traditional public, than students. For a system desperate for investment in quality education, instead it has badly failed in elementary math; and there is great risk of a discriminatory system: Detroit Public Schools today bears the human and fiscal burden of trying to educate most of Detroit’s special education students. In contrast, charter schools are concentrated downtown, with its boom in renovation and wealthier residents. With only 1,894 high school age students, there are 11 high schools. Meanwhile, northwest Detroit — where it seems every other house is boarded up, burned or abandoned — has nearly twice the number of high school age students, 3,742, and just three high schools. The northeastern part of the city is even more of an education desert: 6,018 high school age students and two high schools.

Like others elsewhere, charter schools receive roughly the same per-pupil state dollars as public schools; however, in Detroit, it is about $7,300 a year — roughly half what New York or Boston schools get, and about $3,500 less than charters in Denver or Milwaukee.

With the significant fiscal challenges to the Detroit Public Schools, Mayor Mike Duggan had proposed an appointed Detroit Education Commission to determine which neighborhoods most needed new schools and to set standards to close failing schools and ensure that only high performing or promising ones could replicate. Backed by a coalition of philanthropies and civic leaders, the teachers’ union and some charter school operators, Mayor Duggan has succeeded in restoring local control of majority-black Detroit Public Schools, and supported the proposal. In the waning days of the legislative session, House Republicans offered a deal: $617 million to pay off the debt of the Detroit Public Schools, but no commission. Lawmakers were forced to take it to prevent the city school system from going bankrupt.

An Interview with Gerald Rosen. U.S. District Court Judge Gerald Rosen, who, as we have written, played an invaluable role in the so-called “Grand Bargain,” which paved the way for Detroit to exit the largest chapter 9 municipal bankruptcy in U.S. history—and who will now join retired U.S. Bankruptcy Judge Steven Rhodes, who presided over Detroit’s municipal bankruptcy, in an interview with the Detroit Free Press, said, in response to the query how well Detroit was doing in adhering to its court approved plan of debt adjustment:  “We are hitting the marks, exceeding them in most areas — certainly revenue, I think the last report I saw was about 2 percent above the projected revenue. On budget. Expenditures are below — not much — but slightly below what was projected. Those are two important things…Certainly, investment and growth in the downtown area, certainly Midtown, and with the Ilitch development coming to fruition, the Red Wings, Pistons, some of the entertainment venues becoming a reality now, I expect the area between Midtown and downtown will become very vibrant over the next two-three years.”

Asked what the most difficult part of that case was, aside from the Grand Bargain, Judge Rosen responded: “You have to go back and see what the case was when we found it, which was an assetless bankruptcy. That was the most difficult part, for me. Certainly, there were a lot of first-impression legal issues. Certainly there were issues that could have gone all the way up to the U.S. Supreme Court, whether it was the collision between the federal bankruptcy code and the federal constitutional supremacy clause and the Michigan Constitution’s provisions to protect pensions. But there were also a lot of other really important issues: The tenor of the security instruments, of the finance instruments, the level and tenor of their security, were all major issues in the bankruptcy, whether they could be crammed down all across the rope line on the financial creditors’ side were really first-impression issues.” He added: “Overwhelmingly, the most challenging issue for me was an assetless bankruptcy—other than the art. I’ll never forget when I was reading Kevyn Orr’s proposal for creditors, coming to the asset section and realizing that there really weren’t any assets other than the art…It was devastating. Kevyn, he had just hired Christie’s to appraise the art, so he was clearly serious about it. I remember thinking, ‘What the hell have I gotten myself into?’ My job is to get deals. To get deals, you have to have revenue or assets that can be monetized into revenue, and the cupboard was pretty much bare. There didn’t seem to be much to work with for deals, other than the art.

There were other aspects to the DIA that I was concerned about. This was a time when Detroit was cannibalizing its heritage to mortgage its future, consistently over the decades. In terms of Detroit’s future, it didn’t make sense to me to do that again, but I was realistic.

Time was Detroit’s enemy. The only way to get through the bankruptcy in any sort of expeditious way was through consensual agreements, and the only asset that could be monetized was the art. So that’s basically what led to the idea of the Grand Bargain—trying to figure out a way to monetize the art without liquidating it, and giving the proceeds to the retirees. Neat trick.

I’ll never forget sitting in this little condo (in Florida) thinking, “What the hell have I gotten myself into? Is my legacy going to be that we liquidated one of the great art collections in the world for sheikhs in Dubai and oligarchs in Russia?” I wasn’t very excited about that.

There was another aspect too. One of the few nascently growing areas in Detroit was Midtown. I went on the DIA website and I saw that the DIA attracted over 600,000 people a year to Midtown. I thought, “Gee whiz, liquidating the DIA would be like dropping a hydrogen bomb in Midtown.” It would suck the life out of it. So there was that part of it.”

What would be the theme song for Detroit’s bankruptcy case?

“Don’t Stop Thinking About Tomorrow.”

We might be having some new City Council members a year from now. What would you suggest to the new ones potentially coming on board?

“I’m not in politics. I’m not a political person in the sense of being involved in the political maw, but my observation is that Mayor (Mike) Duggan is working very positively with President (Brenda) Jones and other members of the council in a way that has not been done by any mayor in years and years.

“At the same time, my word of caution is that we have to be careful to continue to provide the fertile ground that Detroit is for investment for people coming in. Part of that is not placing onerous regulation on people coming in, with artificial employment requirements. I understand the social need for that and I applaud it. I think if Detroit is going to continue the comeback that we are on, the neighborhoods have to be part of it and the African-American population has to be part of it. But you can’t disincentivize people coming in.”

You think that’s been done recently?

“I’m a little bit concerned about the community benefits ordinance. The one that was passed was certainly better than the alternative, but I’m still leery of it because it’s creating entry barriers.”

What was the most surprising individual (Kwame Kilpatrick text) message you saw?

“A lot of that is sealed. I would just refer to it generically by saying there was very little public business conducted by the Mayor and his associates. I’m sure they conducted business by communication means other than texts, but these were city-provided pagers. I assume that the city provided the pagers for people to be able to conduct city business on them, and I saw very little. I learned a lot of new text language that I hadn’t known before, and I appreciate urbandictionary.com.”

Twenty-four hours left in the Obama administration. It’s pardon and commutation time. Does the former mayor deserve one?

No. Absolutely not. I have to be a little cautious, but I presided over that grand jury for 2 ½ years.

Political Leadership & Municipal Insolvency. In Virginia, Petersburg residents who blame their elected municipal leaders for their city’s collapse into insolvency have filed dual petitions to oust both the incumbent and former mayor from their City Council seats—after, over months, gathering the legally required number of signatures from registered voters of Wards 3 and 5 to ask for the removal of Mayor Samuel Parham and W. Howard Myers, whose term as mayor ended this month; both are up for re-election next year. According to the petition, Mayor Parham “has conducted himself in the office of City Councilman, Vice Mayor and Mayor in such a way to govern the City of Petersburg chaotically, unpredictably, secretly and wastefully.” The two-page cover sheet to the petition has garnered 276 certified signatures. (Virginia law requires the petitioners to gather signatures equal to 10 percent of the voter turnout in the contest that resulted in an official’s initial election. For Parham, the number is 160.) The petitions were filed on January 20th in Petersburg Circuit Court under a provision in Virginia law which allows the court to remove officials for specific reasons, which includes certain criminal convictions. Here, in this instance, petitioners cited “neglect of duty, misuse of office, or incompetence in the performance of duties,” faulting the current and former mayor with failing to heed warnings of Petersburg’s impending insolvency, but also alleging ethical breaches and violations of open government law. “Nothing has happened in the new year, with the installation of new council officers, to demonstrate that Myers or Parham are any more capable of providing effective oversight of city government than they have over the past two years,” according to Ms. Barb Rudolph, a local activist and organizer of the good government group Clean Sweep Petersburg. The effort came as Petersburg’s mounting legal claims have now exceeded nearly $19 million in past-due invoices and the city’s budget which was $12 million over budget: the municipality has experienced a stretch of structurally imbalanced budgets dating back to 2009. The City Council fired former City Manager William E. Johnson II last March. For his part, Mayor Parham defended his decisions since taking office, reporting he has done the best he could with the guidance he has received, and noting: “I serve at the pleasure of the people of Petersburg and, with God as my witness, I have tried my best.”

The ouster filings came as former Richmond City Manager, now consultant Robert Bobb, has been hired by the City Council to try to put the city back into solvency. Mr. Bobb has issued a request for a forensic audit of spending over the past three fiscal years—notwithstanding reservations expressed by City Attorney Joseph Preston, who noted that the city’s finances are included in a special grand jury investigation which began as a probe of the Petersburg Police Department. Petersburg obtained short-term financing last month to help meet payroll and other ongoing expenses, with Mr. Bobb reporting the cost of Petersburg’s outstanding invoices has been cut from nearly $19 million to about $6 million. Next comes a session to meet with about 400 of the city’s vendors to try to begin to sort out what they are owed, with a city spokesperson Thursday stating the Petersburg has entered into a payment plan to make good on Petersburg’s share of employee and school worker pensions overdue to the Virginia Retirement System: Petersburg and the city school division collectively owed just over $4.2 million to the system as of last week; however, current payments have resumed, and plans are in place to pay down the balance by $100,000 each month, officials said.

The citizen petitions focus largely on events from last year, but reference years of mounting trouble. The issue for the courts is sufficiency, as a judge in Bath County last week demonstrated when the judge dismissed a similar petition to remove three members of the county’s Board of Supervisors, finding the complaints raised by residents there were insufficient to require a judicial reversal of election results. However, Ms. Rudolph said the Petersburg petitions contain more serious charges, noting: “We believe that, on its merits, it’s far more substantive than the Bath County removal action that was recently rejected by the circuit court there.” Included among the two-page list of grievances documenting reasons for Mayor Myers’ removal were allegations he had “flagrantly and repeatedly acted in contravention of the City of Petersburg’s Code of Ethics” by attempting to “intimidate and silence a critic,” who remains unnamed, by “attempting to harm the citizen’s good standing with her employer.” Petitioners also criticized the Myers-led council for possibly violating the Council’s own rules and the city charter in holding a re-do of a vote to bring in the Bobb Group two days after an initial measure to hire the firm failed. City Attorney Preston has said that the Council did nothing wrong.

Quake & Shake. San Bernardino, on track to end the longest chapter 9 municipal bankruptcy in U.S. history next month, now faces a physical and fiscal challenge not listed in its plan of debt adjustment: a substantial earthquake risk. San Bernardino has two independent engineering evaluations — from 2007 and 2016 — saying City Hall would be unsafe in an earthquake. Specifically, the February 2016 study concludes a magnitude 6.0 earthquake would lead to “a likelihood of building failure” for City Hall, which was designed before code updates following the 1971 Sylmar and 1994 Northridge earthquakes. The building sits along two fault lines. That means the City has plans for vacating City Hall by April, as all employees move out of a building determined to be a substantial earthquake risk, with the approximately 200 municipal employees set to relocate to several leased sites set by a unanimous Council vote. A public information counter will direct members of the public to whatever service they’re seeking, as will signs.

Assessing a City’s Fiscal Future

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eBlog, 1/17/17

Good Morning! In this a.m.’s eBlog, we consider—again—the ongoing fiscal and physical challenges to the City of Flint, Michigan in the wake of the disastrous state appointment of an Emergency Manager with the subsequent devastating health and fiscal subsequent crises, before turning to political stirrings in Atlantic City, New Jersey—where, notwithstanding the city’s state takeover, there appears to be rising aspirations with regard to the City Council’s next election.

Out Like Flint. When Michigan Gov. Rick Snyder delivered his State of the State speech a year ago, he addressed Flint’s water crisis by directly speaking to the city’s residents to say: “I am sorry, and I will fix it.” Today, one year later, as Gov. Snyder preps for his seventh annual address to state legislators, filtered and bottled remain the only safe way for its residents—any resolution of the health care crisis and threat caused by the state’s then-appointed Emergency Manager’s actions that led to such life-endangering contamination problems could be more than two years away from reaching every home. The city’s elected officials contend that Gov. Snyder has not secured sufficient funding to address the city’s problems, while the Governor’s office points to the state’s allocation of $234 million in aid and Congressional approval of $170 million in Flint-inspired funding from which the city may be able to tap tens of millions of dollars. In addition, a year-long Michigan Attorney General’s Office investigation into the Flint crisis has resulted in the filing of charges against 13 city and state workers and officials, including former state-imposed Emergency Managers Darnell Earley and Gerald Ambrose. (From April 2014 until the fall of 2015, while Flint was under state control via Gov. Snyder-appointed emergency managers, the city drew its water from the Flint River, but failed to treat it properly to prevent pipe corrosion, thus allowing lead to not only leach into the drinking water, but also damage the pipes themselves, creating a need for replacement.) It was just a year ago, in his annual address to the Michigan Legislature that Gov. Snyder devoted the first 20 minutes of address to outline the mistakes made in Flint—and his battle plan to overcome them, telling legislators: “There can be no excuse—when Michiganders turn on the tap, they expect and deserve clean, safe water…It’s that simple. It’s that straightforward. So that’s what we will deliver. To the families in Flint, it is my responsibility, my commitment, to deliver…I give you my commitment that Michigan will not let you down.”

Indeed, in that year, crews have replaced service lines in 780 homes so far, according to retired Brig. Gen. McDaniel, who heads the replacement program, who yesterday noted: “If we can do 6,000 homes per year, for the next three years, we should address the problem we have.” Under Gen. McDaniel’s timeline, however, completion and restoration of trust in governance will not be complete until late 2019 or early 2020—and, mayhap more worrisome, funding to pay for the work has not yet been secured.

For her part, Flint Mayor Karen Weaver has constantly lobbied the state for more funding, but reports that the response from Gov. Snyder’s office has been disappointing: one of the reasons for the slow movement of her Fast Start replacement program, which was designed to target neighborhoods with seniors, homes with high lead readings, and high concentrations of children age 6 and under who are most vulnerable to lead exposure. Or, as she put it yesterday: “We should have had money right then…We had $500,000 to start…We’re in our third year of not being able to drink our water. Now where does that make sense in the United States of America? No place that I know of.”

Sen. Jim Ananich (D-Flint) reported he would, as a former teacher, give Gov. Snyder an “incomplete.” While crediting the state’s efforts to provide health services and monitoring, he said funding in general is lacking—and the provision of state aid has, at times, been bungled, noting an original state appropriation of $2 million intended to support families facing water shut-off for non-payment: “That plan included a stipulation that in order to get the money, 70 percent of customers, commercial and residential, have to be up to date on payments,” even though customers were being asked to pay for water they could not use safely, so that, as he put it: “To rectify a problem of undrinkable water, the fix is to make people pay or cut them off.” Sen. Ananich and Genesee County health officer Mark Valacak have praised the state’s immediate health efforts targeting Flint’s most vulnerable populations, its youngest children and pregnant women, but have stressed the need to create a database to track the impacts of residents’ exposure to contaminated water, so that there is a critical understanding of potential long-term human impacts—a request, in response to which, the Michigan Department of Health and Human Services last Friday announced there would be a one-year $500,000 grant to Michigan State University for “long-term tracking of residents exposed to Flint water” between April 2014 and now. It would seem the state ought to–at the same time–undertake an effort to examine the impact on Flint’s assessed property values.

Nevertheless, Mayor Weaver and Flint City Councilman Eric Mays are concerned that the state’s efforts have not closely involved local residents, or, as Councilman Mays put it: “We know (Snyder) has another State of the State address coming up…and we’ll see if he spends as much time on this one talking about Flint as he did on that one…But I don’t believe he’s pushed the Legislature to do what they could do.”

Succession? Even in a city taken over by its garden state, there appears strong interest in who might be the next Mayor. Thus, in Atlantic City, Fareed Abdullah, a substitute teacher and former City Council candidate, has thrown his hat into the ring: he will face Council President Marty Small and Councilman Frank Gilliam in the June Democratic primary, where the winner will take on Republican Mayor Don Guardian. Mr. Abdullah reports: “I want to re-do Atlantic City…People feel left out. And we have to make sure that Atlantic City residents’ voices are heard, and that’s what I’m focused on.” He adds that his priorities include reducing taxes, creating jobs, making re-entry programs for those convicted of crimes and youth programs tied to science and technology, and improving police-community relations: “I want to work with private-sector companies throughout the country, and throughout the world really, to bring more businesses to Atlantic City, which in return would reduce our taxes because we will have more ratables…Building up small businesses and absolutely trying to realize that this is what has made Atlantic City great. The barber shops. The corner stores,” he said. “We don’t want people to forget there’s a whole culture in the barber shop.” (Mr. Abdullah has twice run unsuccessfully for City Council (in 2009 and 2013, just missing election by 72 votes in the most recent), after losing the first effort in no small part because of a 1997 cocaine possession conviction.