The Challenging Transition in the Wake of a State Takeover

September 25, 2018

Good Morning! In this morning’s eBlog, we report on the likely extension of the Garden State takeover of Atlantic City, because, as one of our most respected and insightful fiscal experts there, Marc Pfeiffer, the Assistant Director of Rutgers University’s Bloustein Local Government Research Center, put it: it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period. That is, Mr. Pfeiffer believes continued state oversight will be a positive for Atlantic City municipal bondholders, because it assures more fiscal discipline will be in place—or, in his own words: “You are going to have ongoing stability while the state is involved…The city will have to show that it can stand on its own.”

The Steep Road to Municipal Fiscal Recovery. In the wake of a release of a new state report, “Atlantic City, Building a Foundation for a Shared Prosperity,” [64-page report]  released by New Jersey Gov. Phil Murphy’s administration, a report recommending continuation of the almost two-year-old state takeover of Atlantic City’s finances, that state governance now appears likely to last a full five years, due to “longstanding challenges” to New Jersey officials, as recommended by the Governor’s office. While the Governor, in his campaign, had, as part of his platform, a commitment to terminate the state takeover of Atlantic City, now, three-quarters of a year after taking office, the Governor appears likely to leave the state takeover in place—indeed, possibly for an additional three years.

The Murphy Administration has released a plan to assist the city to get back on its fiscal feet, a plan which benefited from input from numerous study groups, task forces, and committees, as well as a redirection of some state government funds to youth programs, and a training program for municipal department heads; that plan does not end the takeover; rather the report recommends keeping the takeover in place for the full five years called for under the 2016 law, unless signal fiscal and financial improvement is put in place before then, including the significant reduction or total elimination of Atlantic City’s reliance on state aid—or, as Gov. Murphy put it: “We had a pretty clear-eyed sense of what the challenge was…That doesn’t mean Atlantic City doesn’t need the state, that the state won’t continue to stay the course and be a partner. We’re not going away; we’re going to go out and executive this plan.”

Under New Jersey’s state takeover law gave the state broad powers, including the right to overturn decisions of the city council, override or even abolish city agencies and seize and sell assets, including Atlantic City’s much-coveted water utility. The statue empowers state overseers, in addition, to hire or fire workers, break union contracts, and restructure Atlantic City’s debt, most of which was done to varying degrees, although no major assets have been sold off.

What Is the City’s Perspective? Atlantic City Mayor Frank Gilliam has conceded the uncomfortable governance challenge under the takeover, which was initiated in November of 2016 by former Governor Chris Christie, but he notes that Gov. Murphy’s administration has been willing to listen to concerns and work with city officials, even as it has retained the final governing say-so.

How Can a State Transition Governance Back to a City? Unlike under a chapter 9 municipal bankruptcy, where a federal bankruptcy court has the final say in approving (or not) a plan of debt adjustment under which governance authority reverts back to a municipality’s elected leaders, a state takeover lacks a Betty Crocker cookbook set of instructions. Gov. Murphy’s quasi-emergency manager, Jim Johnson, whom the Governor named to review Atlantic City’s transition back to local control, said the state administration should remain in place for an additional three years, unless Atlantic City’s reliance on state aid has been “substantially reduced or eliminated” and that its municipal workforce is on “solid footing.”  Under the provisions of the state takeover, enacted shortly after Atlantic City nearly defaulted on its municipal bond debt, the state was empowered to alter outstanding debt and municipal contracts—or, as Mr. Johnson wrote: “Atlantic City has a set of fiscal, operational, economic and social challenges that will only be resolved with significant direction from, and partnership with the State.”

Focus on the Fiscal Future. Mr. Pfeiffer said it is important for New Jersey and Atlantic City to focus on long-term challenges beyond the state takeover period, adding that the continued state oversight will be a positive for Atlantic City municipal bondholders, because it will assure greater fiscal discipline will be in place, or, as he put it: “You are going to have ongoing stability while the state is involved: The city will have to show that it can stand on its own.”

The report outlines a series of recommendations such, as:

  • the importance of diversifying Atlantic City’s economy beyond casinos,
  • providing increased training for senior municipal workers, and
  • purchasing data that can better track city services.

Mr. Johnson also urged Atlantic City to redirect Casino Reinvestment Development Authority funds into new development projects and toward providing increased financial support for youth programming.

Transitioning Back to Local Control. Atlantic City Mayor Frank Gilliam noted: “The citizens of Atlantic City deserve to have their local elected officials control their destiny…I am very optimistic that this is a huge step in the right direction for Atlantic City and its future.” Mr. Johnson, who was a primary challenger to the Gov. two years ago, was named after that election as a special counsel to review the state’s oversight of Atlantic City—and he came somewhat prepared thanks to his previous service as a U.S. Treasury Undersecretary for enforcement under former President Bill Clinton.

Gov. Murphy, who had been critical of the state takeover during his gubernatorial campaign, and who had criticized former Gov. Chris Christie’s administration for implementing it without support from former Mayor Donald Guardian, noted: “This is a community that needs the state’s help as a partner, not as a big-footing jamming down, taking away—you know, taxation without representation,” adding: “That doesn’t mean that Atlantic City doesn’t need the state, that the state isn’t going to stay the course and be a partner.” The Governor, soon after assuming office, had removed former Gov. Christie’s designated takeover manager Jeffrey Chiesa as the state designee to oversee the state role in Atlantic City. It should be noted, as we have previously, that Mr. Chiesa forged a number of settlements on owed casino property tax appeals and effected a $56 million reduction in Atlantic City’s FY2017 budget. All of which brings us back to the wary fiscal trepidation of Mr. Pfeiffer, because Atlantic City’s debt is still in the high risk range so favored by some casino players in the city: a CCC-plus from S&P Global Ratings and Caa3 from Moody’s Investors Service.

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

August 31, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fiscal, Physical, & Human Challenges of Municipal Governance

August 6, 2018

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

An Enduring State of Emergency. Governor Rick Snyder of Michigan was in West Michigan yesterday morning: he was touring a water system construction site in Parchment, a municipality in Kalamazoo County of less than 2,000. The construction here includes a new pressure reduction system, which will allow Parchment to transition to the City of Kalamazoo water system. The city’s water supply is being flushed out, and the city of Kalamazoo will provide water to Parchment and Cooper Township residents. The transition, raising eerie memories of a previous transfer by the Governor in Flint, comes in the wake of finding that water in Parchment was contaminated with man-made chemicals called perfluoroalkyl and polyfluoroalkyl substances (PFAS). City residents were warned to stop using the water due to the contamination on July 26th, after water tests showed the PFAS level in Parchment was 20 times higher than the EPA recommended amount of 70 parts per trillion. A local state of emergency has been set for Parchment, and neighboring Cooper Township, after, just last week, Gov. Snyder declared a state of emergency for Kalamazoo County.

Fear for children—fear that the impact of Flint’s lead-tainted water could last decades—and distrust in the state and local governance to make decisions affecting children whose development could be hurt, is, unsurprisingly causing generations of residents to lose trust in government. It is, of course, at the same time tainting the assessed property values of homes in cities in Michigan so adversely affected for decades to come by state-imposed emergency managers. What parents would wish to move to a municipality knowing the drinking water would have long-term devastating consequences for their child?

What are the fiscal challenges for municipal elected leaders—especially in a state where the long-term physical and fiscal damages were wrought by state-imposed emergency managers? What do the long-term health effects for children exposed to the lead-tainted water mean for a municipality with regard to legal vulnerability and to financing a long-term recovery? At a conference at the end of last week, Detroit News reporter Leonard Fleming noted: “They don’t trust government officials: It could take a generation or two for residents to trust the city and state again and its water.”

At the conference, Dr. Lawrence Reynolds, who was on the Governor’s Flint task force, said some health officials have tried to minimize the effects of the water on residents; nevertheless, he warned there are babies who drank lead-tainted formula for six to nine months who could experience serious disabilities later in life: “It was a civil rights crisis, a human rights crisis, an environmental racism, and there is no excuse for what was done.” Moreover, there appears little end in sight: Cynthia Lindsey, an attorney representing Flint residents in a class-action lawsuit, said it could take three to four years for the legal process to play out. That is, Flint is held hostage by decisions imposed upon it by a state-imposed emergency manager, and now the question of who will finance—and how long will it take to replace all the city’s pipes, provide it access to safe and affordable drinking water, and long-term health care appear to be decisions to be made in a courtroom.

The fateful decision that led to the lead water contamination was not a municipal decision, but rather one made by the state in 2011 via a state imposed emergency manager, Darnell Earley. That was a decision which led to the finding that hundreds of children have since been diagnosed with lead poisoning; a dozen Flint residents have died of Legionella from drinking river water. Today, some 15 state public employees have been indicted by Michigan Attorney General Bill Schuette for their roles in the water crisis—indictments on charges ranging from obstructing an investigation to involuntary manslaughter.

Now Attorney General Schuette is running to replace the term-limited Governor Rick Snyder. Some in the state claim the candidate is using the Flint charges to “make himself look like a hero.” In the Democratic gubernatorial primary, ex-state Senator Gretchen Whitmer (D-Lansing) has released a plan to speed the replacement of lead pipes, while former Detroit health director Abdul El-Sayed received the endorsement of “Little Miss Flint,” the student whose letter brought former President Barack Obama to the community.

Former Flint Mayor Dayne Walling, who lost his first race for that position in 2009 to a car dealer named Don Williamson, but, when former Mayor Williamson resigned to avoid a recall for lying about the city’s budget deficit, was elected in a special election to replace him: he was elected after promising “to transform Flint into a sustainable 21st-century city with new jobs, safe neighborhoods, great schools and opportunity for all.” Candidate Walling reports that his own trust in government is lower than it was prior to the city’s drinking water contamination; now he claims he wants to take the hard lessons he has learned to the place he sees as the major source of Flint’s problems: the state capitol in Lansing.

Representation could matter: over the last four decades, assessed property values fell more than 40 percent—and with them property tax receipts. That led to, after the city’s police union’s refusal to accept pay cuts, laying off a third of the police force—meaning that for a period of time, the city, with about 100,000 residents, was sometimes able to put only six officers on the street at one time. Unsurprisingly, murders nearly doubled between 2009 and 2010—a year when Flint had the nation’s highest murder rate—and the year when Gov. Ric Snyder announced he was appointing an emergency manager, Ed Kurz, to preempt local control and authority in an effort to eliminate the city’s $10 million general fund deficit. Just prior to that preemption of local authority, the Flint City Council had endorsed a plan to detach the city from the Detroit water system, due to what the Council believed to be unaffordable rates, and join the new Karegnondi Water Authority, which planned to build a pipeline from Lake Huron. Mr. Kurtz authorized an engineering study to prepare the city’s water treatment plant to process Flint River water instead. A sequential state-appointed Emergency Manager, Darnell Earley, implemented the changeover—a fateful decision with precipitous health and human safety and fiscal consequences. Mr. Earley has been charged with false pretenses, conspiracy, willful neglect of duty, misconduct in office, and involuntary manslaughter—charges which will be aired next Monday at a hearing, where he is likely to maintain That the City Council had decided to draw from the Flint River until the new pipeline was completed, and that he was, therefore, only executing their orders. (Mr. Kurz, who has not been charged, has previously testified before Congress that his responsibility was “strictly finance,” thus, he bore no responsibility to ensure “safe drinking water.”

Today, Mr. Walling, currently working as a public policy consultant for Michigan State University, notes he believes there ought to be changes in the relationship between Flint and the State of Michigan, noting: “The distress of Michigan’s cities, starting with Detroit and Flint, is a direct result of policies made in Lansing,” adding: “The only good news is that policy changes at the state level can help restore Michigan’s once-great cities.”

According to a Michigan State University 2015 study: “Beyond State Takeovers: Reconsidering the Role of State Government in Local Financial Distress, with Important Lessons for Michigan and its Embattled Cities,” by Joshua Sapotichne, Erika Rosebrook, Eric A. Scorsone, Danielle Kaminski, Mary Doidge, and Traci Taylor; the State of Michigan has the second-most stringent local taxation limits in the nation—limits which impose what they term “tremendous pressure on local lawmakers’ ability to generate critical revenue.” The fiscal pressure on the state’s local governments has been intensified by decisions to divert revenue sharing, the former program intended to address fiscal disparities, to instead enable state tax cuts. The decision disproportionately impacted the state’s most fiscally challenged municipalities: Flint’s loss was $54 million; Detroit lost $200 million, contributing to its 2013 chapter 9 municipal bankruptcy. Indeed, the state decision indirectly contributed to state imposition of nine emergency managers.

Thus, unsurprisingly, former Mayor Walling has a list of the new policies he wants to enact as a state representative: Allow cities to charge commuters the same income tax rate as residents (instead of just half); broaden the sales and use tax to services; provide state pension retirement assistance. This would have especial import for Flint, where the city’s taxpayers are currently financing the pensions of employees who worked for the city when it had 200,000 residents—pension payments now consuming, he says, a quarter of the city’s budget.

Trust & Intergovernmental Tensions. By candidate Walling’s own admission, throughout most of Flint’s drinking water crisis, he believed assurances from the Environmental Protection Agency and the Michigan Department of Environmental Quality that Flint’s water met safe drinking standards. When residents confronted him with discolored, foul-smelling water, he said: “I thought that water had come out of their tap because of a failure in the system at their house or near the house,” adding that it was not until three years ago when, in the wake of listening to Dr. Mona Hanna-Attisha describe her discovery that Flint children were showing elevated levels of lead in their blood, did he finally realize the city’s entire water system was tainted, asserting that it was at that moment in time that he ordered the city to issue a lead advisory, advising mothers not to mix hot tap water with formula, and for all residents to filter their water and flush it for five minutes. (In her recent memoir, What the Eyes Don’t See, Dr. Hanna-Attisha devotes an entire chapter to her meeting with Mr. Walling, criticizing him for opting out of joining her news conference on lead levels, because he was more concerned about traveling to Washington to meet Pope Francis.)

Candidate Walling’s campaign flyers assert: “My priorities are roads, schools, jobs.” they declare. As he challenges incumbent Mayor Karen Weaver, he says most voters he interacts with want to talk about the shabby state of Michigan’s roads or the excessive auto insurance rates paid by residents of Flint and Detroit. But, it appears, he is willing to support repeal of Michigan’s Emergency Manager law—a concept which journalist Anna Clark notes, in The Poisoned City, her new history of the water crisis: “The idea of emergency management is that an outside official who is not constrained by local politics or the prospect of a reelection bid will be able to better make the difficult decisions necessary to get a struggling city or school district back on solid ground.” But in Flint, emergency managers made decisions based on saving money, not the health and safety of the citizens with whose well-being they had been entrusted. Candidate Walling, in retrospect, notes: “I wish that I had never been part of any of it: “This has all happened to a community that I deeply love, and it is motivating me to make sure policy changes are made to make sure this never happens again.”

Restoring Power–and Recovering Governing Authority

July 10, 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Motor City Rising

June 1, 2018

Good Morning! In this morning’s eBlog, we consider the remarkable turnaround of Detroit—a city which, when I inquired on its very first day in chapter 9 municipal bankruptcy, for walking directions from my hotel to the Governor’s Detroit office—in response to which I was told the one mile route was not doable—not because I would be too physically challenged,  but rather because I would be slain. Yet now, as the  fine editorial writers for the Detroit News, Daniel Howes and Nolan Finley, wrote: “A regional divide that appeared to be healing since Detroit’s historic bankruptcy is busting wide open over a plan for regional transit, exposing anxiety that the city is prospering at the expense of the suburbs,” noting that the trigger is a is a proposed millage to fund expansion of the Regional Transit Authority of Southeast Michigan, a $5.4 billion plan that would seem to promise an exceptional reshaping of the metro region—indeed: a reversal a what had been a decades-long shift of the economy from downtown Detroit to is suburbs: an exodus that contributed to a wasteland and the nation’s largest ever chapter 9 municipal bankruptcy.” Or, as they wrote: “That battle reveals growing suburban resentments over the region’s shifting economic fortunes: decades-long capital flow is reversing directions as more jobs and tax revenue flee the ‘burbs for a rejuvenated downtown.”

Mr. Finley noted that Mayor Mike Duggan, this week, told him: “I can’t explain why Oakland and Macomb (suburban counties) are doing what they’re doing” three weeks ago Microsoft brought 400 employees from Southfield into the city of Detroit. And last week, Tata Technologies said they were moving 200 people from Novi and into Detroit. Google is in the process of moving people from Birmingham into the city of Detroit.” What the Mayor was alluding to was a u-turn from a decade of moderate and upper income families leaving Detroit for its suburban counties in the days when former Mayor Coleman Young had advised criminals to “hit Eight Mile” has the relationship between the Metro Motor City’s regional leaders become so difficult in the wake of the unexpected reverse exodus: this time from Detroit’s suburbs back into the city. Billions in private sector investment, spearheaded by Dan Gilbert’s Quicken Loans Inc., the Ilitch family, and growing enthusiasm among other business leaders to be part of the city’s post-chapter 9 municipal bankruptcy have been changing demographic and economic patterns.

As the city continues under decreasing state oversight to carry out its judicially approved plan of debt adjustment, Mayor Duggan notes: “Expectations are rising.” This, after all, is not a City Hall bound mayor, but rather what the editors described as a “short, stocky, balding white guy who is no stranger to block after block of dilapidated houses—and who was reelected to a second term with an amazing 72% of the vote in a city where slightly more than 82% of the voters are black—and where, when he took office, there were about 40,000 abandoned homes. He is not a stay at City Hall type fellow either—rather an inveterate inspector of this mammoth rebuilding of an iconic city, who listens—and with his cell phone—takes action immediately in response to constituents concerns. After all, as the Mayor notes: “Expectations are rising…People are putting more demands on me and more demands on the administration, and I think that’s a really good thing and that will keep us motivated to work hard.”

Already, the urban wasteland is changing—almost on a daily basis: already, under a city program which supports renovation over demolition to try to preserve the mid-century architectural character of neighborhoods, that number of abandoned homes has been halved—with many of the units set aside for affordable housing. In his State of the City address this year, Mayor Duggan said he wants 8,000 more homes demolished, 2,000 sold, another 1,000 renovated and 11,000 more boarded up by the end of next year.

On that first day of the nation’s largest ever municipal bankruptcy, Kevin Orr, whom the Governor had tapped to become the Emergency Manager for Detroit, had flown out from the Washington, D.C. region, and told me his first actions were to email every employee of Detroit that he would be filing that morning in the U.S. Bankruptcy Court, but that he expected every employee to report to work—and that the most critical priorities were that every traffic and street light work—and that there be a professional, courteous, and prompt response to every 911 call.  

That was a challenge—especially for a municipality in bankruptcy, but, by 2016, the city had completed a $185 million streetlight repair project; 911 response times have been reduced from 50 minutes in 2013 to 14.5 minutes last year, and ambulance response times fell from 20 minutes in 2014 to the national average of 8 minutes this year.

As we have previously noted, two months ago, just three and a half years after Detroit emerged from chapter 9, the city has exited from state oversight; its homeless population has, for the third consecutive year, declined—and, its unemployment rate, which had peaked during the fiscal crisis at 28%, is now below 8%. No wonder the suburbs are becoming fiscally jealous. And the downtown, which was unsafe for pedestrians when the National League of Cities hosted its annual meeting there in the 1980’s and on the city’s first day in bankruptcy, has been transformed into a modern, walkable metropolis.

Nevertheless, the seeming bulldog, relentless leader has refused to sugarcoat the fiscal and physical challenge—or, as he puts it: “I don’t spend a lot of time promising. I just say, here’s what we’re doing next and here’s why we’re doing it and then we do what we say…Over time, you don’t restore trust by making more promises; you restore trust by actually doing what you said you were going to do.”

Mr. Finley wrote that the Mayor, deemed a “truth teller” by Detroit Housing Director Arthur Jemison, has been direct in confronting the city’s harsh legacy of racist policies after the Great Depression lured thousands upon thousands of African-Americans north in the early decades of the 20th century to work in auto factories—luring them to a city at a time when Federal Housing Administration guidelines barred blacks in the city from obtaining home mortgages and even led to the construction in 1941 of a wall bordering the heavily African-American 8 Mile neighborhood to segregate it from a new housing development for whites.

Aaron Foley — the 33-year-old author of How to Live in Detroit Without Being a Jackass, noted: “When you deliver that kind of message about this is why black people are on this side of the wall in 8 Mile versus the other side of the wall, that gets people talking: This is a history that we all know in Detroit, and for the city government to acknowledge that in the way that it did on that platform, it did resonate.”

Mayor Duggan’s concern for Detroit’s people—and not forcing low-income families out, is evidenced too by his words: “Every single time that we had a building where the federal [housing] credits were expiring and people were going to get forced out of their affordable units, I had to sit down for hours with the building owner to convince them why those who stayed were entitled to be there, and I thought: I need to do just one speech and explain that this is the right thing to do…Since then there’s been just great support for the direction we’re going in the city. We have very little pushback now from our developers over making sure that what they’re doing is equitable.”

Charting a Municipal Rovery Budget

April 5, 2018

Good Morning! In this morning’s eBlog, we shiver on the Appomattox River at first light in the historic Civil War municipality of Petersburg, a municipality which is on the rebound from virtual insolvency—in Virginia, where the state does not specifically authorize its municipalities to file a chapter 9 petition, but does impose a debt limitation barring any municipality from incurring debt in excess of 10% of the assessed valuation of taxable properties. It is a city, which has been, since the dawn of the republic, a strategic center for transportation and commercial activities, and it is a city, which came closest of any in the Commonwealth to filing for insolvency. But, in the wake of the appointment of a former city manager—as well as a state commission to provide assessment and evaluation of municipal fiscal well-being, it is, today, a city of 32,420 that is returning to fiscal health.

Setting the Path for a Strategic Recovery. In her first budget proposal for the historic Virginia municipality of Petersburg in the wake of its insolvency and near first-ever Virginia chapter 9 municipal bankruptcy, City Manager Aretha Ferrell-Benavides, who was hired last June just as consultants charged with turning around the city’s finances told the City Council that it needed a $20 million cash infusion to make up a deficit and comply with its own reserve policies, Manager Ferrell-Benavides proposed a rebuilding budget–even as she  expressed cautious optimism to the Mayor and Council that Petersburg can overcome the challenges it faces and continue to restore its financial standing. Thus, she presented a $73 million proposed operating budget–one which focuses on public safety, more funding for the city’s chronically underperforming schools, but cuts to city departments.

In presenting her proposed FY2019 $102.6 million budget, she told the Mayor and Council the spending plan reflects five “strategic priorities,” led by a focus on establishing the city “as a structurally stable organization with a greater focus on customer service, efficiency, accountability, and transparency.” In addition, she added, she is proposing a budget, which aims to “strengthen our fundamental policy and process to achieve long-term fiscal stabilization.”

She cited other priorities, including boosting economic development, encouraging neighborhood revitalization, promoting community engagement, and neighborhood support. Noting that Petersburg confronts some uncertainty with regard to the levels of funding which will be available from the state and federal governments, Manager Ferrell-Benavides outlined revenue and spending plans, plans which, she advised, were based on “conservatism” in their projections, as she proposed an operating budget slightly under this year’s level–a reduction of about $305,000, or about 0.3 % from the amended budget for the current fiscal year–of which approximately 72% or $73 million would be for the operating budget–a 1.5% drop from the current level, while proposing a 6.4% increase in the capital budget for the city’s Utilities Fund, noting that public safety would remain the largest funding category, at about $18.9 million, or about 26% of the total, comparable to the current level. She proposed $13.6 million for the city’s second largest budget category, Social Services, unchanged from the current level services funding, but recommended an increase of about 3% for the city’s public schools, as part of what she asserted was a continuing effort to restore cuts which had been made during the city’s financial crisis in FY2016. For next year, she proposed that the budget allocate about $9.7 million to the school system, an increase of up about $271,000 from $9.5 million this year.

In a post General Revenue Sharing era, Petersburg, with a nearly 80% black population and where more than a quarter of its families are headed by a female householder with no husband present—and more than 11% of its households headed by a single person over the age of 65—has a median family income of $33,927, with nearly a quarter of its residents below the federal poverty level. It is a city, too, living with fear: on Wednesday, more than 100 guns were taken off the streets and destroyed by the order of Petersburg Police Chief Kenneth Miller, who described these as “illegal guns that were taken off streets.” Indeed, some nine months on the job, Chief Miller has been adamant about his decision to have the guns destroyed and not sold “to put these weapons back on the street for gain…We’re not going to take weapons of destruction and try to make a profit off of that.”

But, fiscally, the city appears to be on a strong road to recovery. Manager Ferrell-Benavides noted that the challenges that the Petersburg still faces include rising health care costs for city employees, aging water and sewer infrastructure, antiquated technology, the need to recruit and retain employees, and ongoing issues with billing and collections. Nevertheless, she said the city’s efforts to date have produced results, notably an improvement in Petersburg’s municipal bond rating from junk status to investment-grade, adding that her fiscal goal is  to wean the city off its use of revenue anticipation notes. Indeed, with her proposed five-year plan in place to build Petersburg’s cash reserve fund to $6 million, a remarkable turnaround from the city’s negative balance in place at the time of the financial crisis, she testified that her proposed budget was intended to help provide stability to city government by seeing the plan through, noting: “I am committed…and our team is committed, to be here for the next five years.” Her proposed $77 million operating budget would boost spending on public safety and restore 10 percent cuts to municipal workers’ pay, while shrinking a workforce that consultants had charged was bloated and structurally inefficient. 

In the wake of her predecessor, William Johnson’s firing for his role in dipping into the city’s rainy day fund two years ago, Ms. Ferrell-Benavides said big goals within her proposal include building up the reserve, reducing reliance on grant funding, and being conservative with estimates. She testified that her proposed budget, overall, represents a $1.1 million decrease from the FY2018 amended budget, and proposes increasing the reserve to $950,000, adding that the city’s reserve funds are out of the red–and, in good gnus, that Petersburg’s bond rating has been upgraded from junk bond status. She noted that Department heads had been instructed to trim their expenses by 10%, but that cutting salaries was not an option. Her proposed budget includes $18.93 million for public safety, a $3 million increase from two years ago–with the increase part of an effort to stem the exodus of public safety workers to surrounding counties. For the city’s kids, she proposed a budget increase of $300,000 over the current $9.7 million level, telling the Mayor and Council: “This is a big step for us. And that was part of the priorities. Our goal is to annually increase our investment in the school system.” 

The consultants are scheduled to be back in Petersburg later this week and will submit an updated report in the coming weeks. Their perspective will help, as the City Council begins the process drill down into the details over the next two months through work sessions and a round of community meetings—meetings scheduled to begin at the end of this month and finish by the end of May: the Council is scheduled to make its recommended changes to the city manager on May 22nd, after which the city has scheduled a public hearing on June 5, with the Mayor Council scheduled to act on final adoption on June 12th.  

Petersburg, a city still not completely free from the grips of financial crisis, has rolled out a $73 million proposed operating budget that emphasizes public safety, more money for chronically under performing schools, and cuts to city departments.

April 3, 2018

Good Morning! In this morning’s eBlog, we consider the challenges of governance in insolvency. Who is in charge of steering a municipality, county, or U.S. territory out of insolvency? How? How do we understand and assess the status of the ongoing quasi chapter 9 municipal bankruptcy PROMESA deliberations in the U.S. territory of Puerto Rico. Then we head north to assess the difficult fiscal balancing challenges in Connecticut.

Governance in Insolvency.  Because, in our country, it was the states which created the federal government, making the U.S. unique in the world; chapter 9 municipal bankruptcy is only, in this country, an option in states which have enacted state legislation to authorize municipal bankruptcy. Thus, unsurprisingly, the process is quite different in the minority of states which have authorized municipal bankruptcy. In some states, such as Rhode Island and Michigan, for instance, the Governor has a vital role in which she or he is granted authority to name an emergency manager–a quasi-dictator to assume governmental and fiscal authority, usurping that of the respective city or county’s elected officials. That is what happened in the cases of Detroit and Central Falls, Rhode Island, where, in each instance, all authority was stripped from the respective Mayors and Councils pending a U.S. Bankruptcy Court’s approval of respective plans of debt adjustment, allowing the respective jurisdictions to emerge from municipal bankruptcy. Thus, in the case of those two municipalities, the state law preempted the governing authority of the respective Mayors and Councils.

That was not the case, however, in Jefferson County, Alabama–a municipal bankruptcy precipitated by the state’s refusal to allow the County to raise its own taxes. Nor was it the case in the instances of Stockton or San Bernardino, California: two chapter 9 cases where the State of California played virtually no role. 

Thus, the question with regard to governance in the event of a default or municipal bankruptcy is a product of our country’s unique form of federalism.

In the case of Puerto Rico, the U.S. territory created under the Jones-Shafroth Act, however, the issue falls under Rod Sterling’s Twilight Zone–as Puerto Rico is neither a municipality, nor a state: a legal status which has perplexed Congress, and now appears to plague the author of the PROMESA law, House Natural Resources Committee Chair Rob Bishop (R-Utah) with regard to who, exactly, has governing or governance authority in Puerto Rico during its quasi-chapter 9 bankruptcy process: is it Puerto Rico’s elected Governor and legislature? Is it the PROMESA Board imposed by the U.S. Congress? Is it U.S. Judge Laura Swain, presiding over the quasi-chapter 9 bankruptcy trial in New York City? 

Chairman Bishop has defended the PROMESA’s Board’s authority to preempt the Governor and Legislature’s ruling and governance authority, stressing that the federal statute gave the Board the power to promote “structural reforms” and fiscal authority, writing to Board Chair Jose Carrion: “It has been delegated a statutory duty to order any reforms–fiscal or structural–to the government of Puerto Rico to ensure compliance with the purpose of PROMESA, as he demanded the federally named Board use its power to make a transparent assessment of the economic impact of Hurricanes Irma and Maria on Puerto Rico’s fiscal conditions–and to ensure that the relative legal priorities and liens of Puerto Rico’s public debt are respected–leaving murky whether he intended that to mean municipal bonholders and other lien holders living far away from Puerto Rico ought to have a priority over U.S. citizens of Puerto Rico still trying to recover from violent hurricanes which received far less in federal response aid than the City of Houston–even appearing to link his demands for reforms to the continuity of that more limited federal storm recovery assistance to compliance with his insistence that there be greater “accountability, goodwill, and cooperation from the government of Puerto Rico…” Indeed, it seems ironic that a key Chairman of the U.S. Congress, which has voted to create the greatest national debt in the history of the United States, would insist upon a quite different standard of accountability for Puerto Rico than for his own colleagues.

It seems that the federal appeals court, which may soon consider an appeal of Judge Swain’s opinion with regard to Puerto Rico’s Highway and Transportation Authority not to be mandated to make payments on its special revenue debt during said authority’s own insolvency, could help Puerto Rico: a positive decision would give Puerto Rico access to special revenues during the pendency of its proceedings in the quasi-chapter 9 case before Judge Swain.

Stabilizing the Ship of State. Farther north in Connecticut, progressive Democrats at the end of last week pressed in the General Assembly against Connecticut’s new fiscal stability panel, charging its recommendations shortchange key priorities, such as poorer municipalities, education and social services—even as the leaders of the Commission on Fiscal Stability and Economic Growth conceded they were limited by severe time constraints. Nevertheless, Co-Chairs Robert Patricelli and Jim Smith asserted the best way to invest in all of these priorities would be to end the cycle of state budget deficits and jump-start a lagging state economy. The co-chairs aired their perspectives at a marathon public hearing in the Hall of the House, answering questions from members of four legislative committees: Appropriations; Commerce; Finance, Revenue and Bonding; and Planning and Development—where Rep. Robyn Porter (D-New Haven) charged: “I’m only seeing sacrifice from the same people over and over again,” stating she was increasingly concerned about growing income inequality, asking: “When do we strike a balance?” Indeed, New York and Connecticut, with the wealthiest 1 percent of households in those states earning more than 40 times the average annual income of the bottom 99 percent, demonstrate the governance and fiscal challenge of that trend. In its report, the 14-member Commission made a wide array of recommendations centered on a major redistribution of state taxes—primarily reducing income tax rates across the board, while boosting the sales and corporation levies. Ironically, however, because the wealthy pay the majority of state income taxes, the proposed changes would disproportionately accrue to the benefit of the state’s highest income residents—in effect mirroring the federal tax reform, leading Rep. Porter to question why the Commission made such recommendations, including another to do away immediately with the estate tax on estates valued at more than $2 million, but gradually phase in an increase to the minimum wage over the next four years.  From a municipal perspective, Rep. James Albis (D-East Haven), cited a 2014 state tax incidence report showing that Connecticut’s heavy reliance on property taxes to fund municipal government “is incredibly regressive,” noting it has the effect of shifting a huge burden onto lower-middle- and low-income households—even as the report found that households earning less than $48,000 per year effectively pay nearly one-quarter of their annual income to cover state and local taxes. Rep. Brandon McGee (D-Hartford), the Vice Chair of the legislature’s Black and Puerto Rican Caucus, said the Committee’s recommendations lack bold ideas on how to revitalize Connecticut’s poor urban centers—with his concerns mirrored by Rep. Toni E. Walker (D-New Haven), Chair of the House Appropriations Committee, who warned she fears a commission proposal to cut $1 billion from the state’s nearly $20 billion annual operating budget would inevitably reduce municipal aid, especially to the state’s cities. Co-Chair Patricelli appeared to concur, noting: “Candidly, I would agree we came up a little short on the cities,” adding that the high property tax rates in Hartford and other urban centers hinder economic growth: “They really are fighting with one or more hands tied behind their backs.”

The ongoing discussion comes amidst the state’s fiscal commitment to assume responsibility to pay for Hartford’s general obligation debt service payments, more than $50 million annually—a fiscal commitment which understandably is creating equity questions for other municipalities in the state confronted by fiscal challenges. Like a teeter-totter, balancing fiscal needs in a state where the state itself has a ways to go to balance its own budget creates a test of fiscal and moral courage.