Monitoring Municipal Fiscal Stress

eBlog, 11/17/16

Good Morning! In this a.m.’s eBlog, we consider the evolving state takeover of Atlantic City, with the appointment by the state of what Mayor Don Guardian deemed the “occupation force.” We consider the role of the state and mechanisms for a state takeover—as well as the options for the municipality. Then we look west to an innovative state-local tax collection sharing effort between the State of Michigan and City of Detroit—mayhap appropriate in the emerging sharing economy; then west where, in the wake of municipal elections in post-chapter 9 Stockton, the newly elected Mayor begins thinking about the city’s further post municipal bankruptcy fiscal future. Then we swing back southeast to the historic small city of Petersburg, Virginia—where a private team has been hired to try to pilot the city—and the region—out of near insolvency. Then we look north, to the land of the incomparable Don Boyd of the Rockefeller Institute, who yesterday was a host to a fascinating session with New York Assistant Comptroller Tracey Hitchen Boyd who discussed with us the Empire State’s “groundbreaking Fiscal Stress Monitoring System to identify local governments and school districts experiencing financial strain.” Finally, with winter beginning to bite, we seek warmth in the Caribbean, venturing back to Puerto Rico, where the Puerto Rico Oversight Board created under the new PROMESA law preps for its meeting tomorrow—a meeting that will come during transition periods of administrations both in the federal and Puerto Rican governments—adding still greater challenges to the U.S. territory’s transition.

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State Preemption of a Municipality? The twilight period during which Atlantic City has awaited its state takeover now appears to be over, or, as Mayor Don Guardian posed it, the “occupation force” of a “governor we don’t like” has been named. New Jersey has tasked Jeffrey Chiesa, a longtime ally and associate of Gov. Chris Christie—indeed, an associate the Governor once named to fill in as one of the state’s U.S. Senators in the wake of the death of former U.S. Sen. Frank Lautenberg, and who also served as New Jersey’s Attorney General, to serve as the “director’s designee” to execute the state takeover of Atlantic City, from which position he will report to New Jersey’s Department of Community Affairs, under the leadership of Tim Cunningham, the Director of New Jersey’s Local Finance Board. In this new capacity, Mr. Chiesa will have far-reaching powers, including the authority to unilaterally hire, fire, eliminate departments and authorities, sell assets, terminate union contracts, and veto any action by City Council, according to the state’s Municipal Stabilization and Recovery Act. In its release, the New Jersey Department of Community Affairs said Mr. Chiesa would use his authority “judiciously.”

In the statement, Mr. Chiesa said: “It is my hope to work together with firm conviction and not disrupt the democratic process…I am committed to improving essential government and community services for the people of the Atlantic City…“I will listen to the people and work hand in hand with local stakeholders to create solutions that will prevent waste and relieve generations of taxpayers from the burden of long-term debt. We will put Atlantic City back on a path to fiscal stability.”

With regard to governance, the Department said Atlantic City Mayor and City Council will “maintain day-to-day municipal functions.”  Mr. Chiesa’s role will be to oversee “fiscal recovery efforts, ” with the release from the Department noting his immediate steps would include entering into PILOT (payment in lieu of taxes) agreements with casinos, ensuring that debt service and county and school payments are made on time, in addition to exploring “right-sizing the City’s work force.” What and how Atlantic City’s elected government leaders will do—and what they may do could now be the outcome of the third branch of the state’s government: the courts, especially in the wake of Mayor Guardian’s making clear yesterday that the city was poised to go to court to block any actions by the state that it regards as civil rights violations. Early yesterday, Mayor Guardian said the city would go to court if the state takes actions “we see as unconstitutional.”

The road ahead promises to be steep: the state takeover comes with the Governor potentially leaving to join the new Trump Administration; Atlantic City has a roughly $100 million annual budget deficit and about $500 million in total debt. The city’s ratable base has declined from $20 billion in 2010 to $6 billion today as the casino town faced more competition in neighboring states: five of the city’s famed boardwalk casinos have closed since 2014—with significant implications for unemployment, per capita income, and assessed property values.

State Preemption. In the wake of last week’s state Local Finance Board vote to usurp major decision-making powers from Atlantic City’s elected leaders week, Local Government Services Director Timothy Cunningham noted: “The simple fact is Atlantic City cannot afford to function the way it has in the past…I look forward to meeting with Mayor Guardian and members of the City Council and starting the process of bringing this great city back to financial stability. It is my hope to work together with firm conviction and not disrupt the democratic process.”

As we have previously noted, the Board’s vote for the takeover came in the wake of the state Department of Community Affairs Commissioner Charles Richman rejecting the city’s fiscal-recovery plan last week—a plan which the Department criticized, because it failed to balance the city’s 2017 budget, ran a five-year shortfall of $106 million, and did not accurately estimate cost and revenue projections. In addition, the Department expressed concerns over the Bader (airport) Field sale, calling the water authority’s plan to issue $126 million in low-interest, long-term bonds to pay for the land “dubious at best.”

The Sharing Economy? The State of Michigan Tuesday committed to begin processing Detroit city business tax returns for the first time next January, enhancing a state-local partnership between the Motor City and the Michigan Department of Treasury that began last year with individual income tax returns and which will extend to business returns starting with the 2016 tax year. Under the new partnership, any business required to withhold city income taxes and any taxpayer who files under Detroit’s corporate partnership and fiduciary rules will be affected by the change: it will allow corporate filers to electronically submit their returns and use other online department services. In addition, partnership and fiduciary filers will submit their returns to the Treasury Department. As part of the reforms, the State’s handling of individual tax returns will allow filers to electronically submit both city and state returns. (Detroit residents pay a 2.4 percent individual income tax rate, while nonresidents pay a 1.2 percent rate. Detroit’s business income tax rate is 2 percent.)

Taking Stock in Stockton. In his first public comments since last week’s election, Mayor Anthony Silva this week said “the hate and the political battles” must end “if Stockton is truly going to heal and move forward.” Noting that: “Stockton is still a divided city,” the new Mayor said: “We have a new mayor, and he is now my mayor.” The outgoing Mayor spoke for five minutes at this week’s City Council meeting, the first such meeting since his lopsided loss last week to City Councilman Michael Tubbs. He graciously added: “I would expect anyone out there who claims to be my friend or one of my supporters not to participate in any sort of hate against the new mayor and to allow him the opportunity to lead.” (Mayor-elect Tubbs will take office January 1st.) Mayor Silva added: “I want you to pray and root for his success. Mayor-elect Tubbs, you have my support and you have my commitment for a smooth transition during the next month and a half. Congratulations.” The Mayor-elect did not refer to the outgoing Mayor’s comments during his own public remarks; rather he said Stockton has much to be grateful for as Thanksgiving approaches, referring especially to voters’ approval in the election of a one-quarter-cent sales and use tax to benefit Stockton’s library and recreation services: “Think of the gifts the voters gave us…That shows me that the residents in the city of Stockton are ready to get to work, that they want to be part of the solution. I think that bodes well for us at the end of this year as we move forward to next year.” (The Mayor-elect won his election by a 70-30 margin.) He added: “In Stockton, we love diversity. We don’t tolerate bigotry. If you’re LGBT, if you’re Muslim, if you’re undocumented, if you’re documented, if you’re immigrant, Stockton is your home, we love you, you’re part of our community.” Outgoing Mayor Silva noted that he had sent a text message to Councilmember Tubbs immediately after the election, and added that the two had “a great meeting” post-election meeting—a meeting he noted which “was important…because four years ago I never got a text message or a phone call or an email from my opponent (then-Mayor Ann Johnston), and then when I reached out to her I still never got one.” He added: “I would never wish this same action upon anyone, and Mayor-elect Tubbs and the new City Council do not deserve this type of hate, either.”

Addressing Municipal Dysfunction. Robert Bobb, the former Richmond, Virginia city manager whose consulting team has been hired on for hundreds of thousands of dollars by the nearly insolvent small, but historic city of Petersburg, Virginia told the City Council this week “There’s a lot of work to do, a lot of clean-up to do. We’re at it every day…There are a lot of dedicated people here who are working hard to help us.” Nevertheless, the challenge is significant: Mr. Bobb estimated the city has just $78,000 in cash in the wake of a debt payment due; yet it confronts critical payments to select vendors; a mandatory $427,000 payment to the school system; and tomorrow’s payroll—and that is after an unexpected fiscal gift: some $1.3 million that the team was able to scrounge up working with the administration of Virginia Gov. Terry McAuliffe and the Virginia Resources Authority from unused municipal bonds dating back to 2013. The challenge is made greater, moreover, in a city where nearly half the city’s children are estimated to live below the federal poverty line, according to U.S. Census data. Mr. Bobb also warned the Council that he remains unable to ascertain how much of the $18 million backlog in past-due bills the city owes that Virginia state officials identified over the summer has been resolved. About $10 million in accounts payable bills remain outstanding; however, there are many other categories of expenses. Moreover, as Nelsie Birch, Petersburg’s deputy interim City Manager and acting Finance Director noted: “That’s only for bills we’ve received,” adding that as of earlier this week there was more than $1 million in the city’s checking account, but “it’s more than spoken for,” noting that payroll costs about $1 million every two weeks. Unsurprisingly, the Council voted unanimously to allow the city manager to make the moves necessary to secure the funding. In addition, the Council authorized acting City Manager to move forward and secure $6.5 million in short-term financing to help Petersburg remain operating through the end of the year, with part of those funds to go toward a lump-sum payment of $1.2 million due by mid-December to help settle a lawsuit filed against the city by the regional South Central Wastewater Authority—where the municipality has been delinquent since last May, threatening the budgets of the other municipalities in its region. Petersburg has agreed to address its outstanding balance within two years, according to the statement, albeit how it will do so is something which remains to be resolved.

Good Gnus, Bad Gnus. Mr. Bobb advised the Council that his team’s fiscal analysis had, to date, discovered both good and bad news: in the latter category, among the most disappointing findings, they determined that a $92,000 cut made this year to the city’s Department of Social Services had triggered a loss of $600,000 in state funds needed to help Petersburg’s most vulnerable residents—especially its children. On the good gnus side, he told them that the dismissal of the South Central region’s lawsuit would clear the path for the city to move forward with short-term solutions that would offer his group the time and space to implement long-term plans to move the city back towards solvency, noting that the city, for the first time since the beginning of the fiscal year, had posted its current fiscal year budget online. However, he also reported that it was not just the city’s taxpayers who had been left in the fiscal dark in recent months: the municipality’s department heads had been operating without spending plans revised to address the $12 million in cuts made by the City Council last September to balance the budget for the first time in nearly a decade. The report, however, also advised Councilmembers that the City Council had voted to approve road projects Petersburg could not afford and that the city’s decentralized system of paying for goods and services was such that finance workers hoping to avoid further overspending could not see what resources had been committed until the office received an invoice. That meant, the team reported to the elected leaders, Petersburg will need to defer some past priorities, including postponing some utility upgrades such as water tank upgrades and overhauling sewage main and lines; museum and golf course upgrades; replacing City Hall; and planned work on other city facilities.

Early Fiscal Storm Warnings. New York Assistant Comptroller Tracey Hitchen Boyd this week, in a communication to New York local elected leaders, wrote that since the state, three years ago, had implemented a “groundbreaking Fiscal Stress Monitoring System to identify local governments and school districts experiencing financial strain,” the state had received suggestions from local leaders on ways to enhance that system, so that the state has opened a comment period to enhance the state’s ability to provide an early fiscal warning to local leaders in order to provide an opportunity to take corrective actions. The program, now in its fourth year, aims to provide an early warning of fiscal problems to local officials and citizens so that corrective actions can be taken before a true financial crisis occurs. The state is completing its fourth year of such reviews, evaluating every city, county, town, village, and school district based on a series of standard financial indicators. Each entity is scored annually to determine if, according to the measures, it falls within one of three levels of fiscal stress. The System also evaluates the general environmental factors affecting municipalities, or, as Ms. Boyd wrote: “We are completing our fourth year of FSMS reviews, evaluating every city, county, town, village, and school district based on a series of standard financial indicators. Each entity is scored annually to determine if, according to the measures, they are in one of three levels of fiscal stress. The System also evaluates the general environmental factors affecting municipalities.”

Federal Preemption. The Puerto Rico Oversight Board has scheduled its first session in Puerto Rico for tomorrow, with the meeting set outside of Fajardo, Puerto Rico. While the session will be by invitation only, it is scheduled to be streamed online at www.oversightboard.pr.gov, and to be followed by a press conference. It follows two earlier meetings convened in New York City. At this week’s session, the agenda includes a presentation by Conway MacKenzie Inc. on the government’s liquidity; a presentation by the Puerto Rico Aqueduct and Sewer Authority; public testimony on Puerto Rico’s proposed fiscal plan; and the creation of procedures to approve transactions of the board’s “covered entities.” The session comes as the U.S. territory confronts a $3 billion cash shortfall in its current fiscal year—having disclosed that sum yesterday as part of its report it will be presenting to the PROMESA Board tomorrow—with that tidy sum coming due next February—assuming that would be the proximate date of the lifting of the current debt payment moratorium, but also optimistically assumes Puerto Rico will not have reached agreements with its creditors by that date: the tidy sum, after all, represents nearly 33% of Puerto Rico’s current approved fiscal year budget. Moreover, the island faces some $2.2 billion in municipal bond debt service between then and the end of its fiscal year—not to mention some nearly $850 million in unpaid municipal debt service. The territory’s government has sought to address its growing financial crisis via any number of avenues, including the deferral of payments to suppliers and the deferral of tax payments; however, it is running out of fiscal options.

Post Municipal Bankruptcy Governance

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eBlog, 11/09/16

Good Morning! In this a.m.’s eBlog, we observe election results in San Bernardino, where the voters, by a wide margin in a city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, voted to move to a city manager type of governance; then we head sharply across the nation to New Jersey, where, this morning, the New Jersey Local Finance Board will begin the process for the state to determine if and how it would wrest governance authority from Atlantic City. Finally, we do a U-turn back to the West coast, where voters in post-chapter 9 Stockton voted to reject the incumbent mayor and elect one of the youngest new mayors in the nation—Councilmember Michael Tubbs, who jubilantly crowed:  “We have a great opportunity to show the nation, ‘How do you reinvent yourself?”  

Post Municipal Bankruptcy Governance. Voters in the nation’s city nearing the denouement of the longest-ever municipal bankruptcy are on the verge of replacing a governing document which many city leaders and, in our in-depth report, we believe has hobbled the city for years, voting by an official 60 percent margin to adopt Measure L, which would replace the San Bernardino City Charter with a new one—that is, the rules of the road that govern how the city is run, comparable to a state’s constitution, essentially moving the city to a city manager form of government, will change dramatically. The measure replaces San Bernardino’s charter with a new one, written over a two-year period by a committee based on state and national models. Or, as the head of the drafting committee which authored the new charter noted, “This is the beginning of a new day for the city, one that a lot of people worked very hard for, and I want to thank all of you: This city can now become what it used to be and what it should be.” His comments were in sharp contrast to former City Attorney James Penman, one of the leading opponents of Measure L, who said he was not surprised by the apparent defeat and hoped he was wrong in his predictions that the charter change would enable corruption, adding he prayed he was “wrong: I want to see San Bernardino do well, and I hope that whoever the future city managers are led well.” Mr. Penman stated that a city manager form of government works best when voter engagement is high—something which, historically, has not been the case in San Bernardino. However, advocates of Measure L believe that gloom will change, because turnout in future elections is projected to increase substantially, because it moves future elections for city officials from odd-number years to match California state elections—November of even-numbered years. (Four years ago, 61 percent of San Bernardino voters came out to vote for President, compared to the last Mayoral election in 2013 when the election turnout was below 16 percent.) Measure L was drafted over a two-year period by a committee based on state and national models. As adopted it provides that the offices of city attorney, city clerk, and city treasurer—currently elective offices—will instead be appointed, and responsibility for some day-to-day operations will shift from elected City Council members to the city manager, who is appointed by the City Council. In addition, pay for police will be set through collective bargaining, instead of through the unique formula San Bernardino has used for decades, which bases the pay on the average of 10 like-sized California cities. San Bernardino has operated under its own city charter, albeit amended several times, since 1905.

State Preemption of a Municipality? The New Jersey Local Finance Board will consider in the next few hours whether to wrest power and authority from Atlantic City’s Mayor and Council and grant them to a state official to turn around the city’s near insolvency in the wake of last week’s rejection of the city’s turnaround plan, when New Jersey Department of Community Affairs Commissioner Charles Richman, in a 14-page reply, said the city’s supplemental information did not change his view, in some part because it was still overly reliant on state aid and a partnership with the state: “The extent to which the city minimizes the plan’s weaknesses by invoking the value of a partnership to propel the plan forward is, to me, confirmation that the plan does not stand on its own. Ergo, this morning, following are the ten powers the state can take under the so-called takeover law:

State Usurpation Powers. The state’s takeover law provides for state authority powers, including authority to “unilaterally modify, amend, or terminate any collective negotiations agreements, except those related to school districts.” The law also permits the state authority of “selling, conveying, leasing, monetizing, or otherwise disposing of any interest in any municipally-owned assets.” (The city’s Bader Field, a 143-acre former airstrip, and the Municipal Utilities Authority, the city’s waterworks, are considered two of the city’s most prized assets—and monetizing those assets had been a signal part of the city’s proposed, but rejected recovery plan.) The state can unilaterally “appoint, transfer, or remove employees” of the city, up to and including department and division heads; such state authority excludes appointed officials who have received tenure.

  • Enter shared services agreements.The state, under the law, may strike agreements with Atlantic County, other municipalities, or “any instrumentality of the state” to share or consolidate municipal services. (Atlantic City recently reached a shared services deal with Atlantic County for senior and health services.)
  • Restructure debt.The state can retain bond counsel, adopt bond ordinances, and take “any other steps necessary” to restructure and adjust debt. (Atlantic City has roughly $500 million in total debt.)
  • File papers in bankruptcy court. The State of New Jersey may file a chapter 9 municipal bankruptcy petition and other pleadings and papers with any United States court or federal bankruptcy court for the purpose of “effecting a plan of readjustment or composition of debts;” however, the state must first have the approval of the legislative Joint Budget Oversight Committee.
  • Abolish city departments.The state’s sweeping powers also include “dissolving, terminating, transferring, abolishing, or otherwise disposing of any municipal authority, board, commission, or department.”
  • Control legal affairs.The state can take over the city’s litigation and legal affairs, including suing in the city’s name, prosecuting, defending, and resolving litigation, arbitration, disputes, and controversies.
  • Purchasing goods and services.The state may procure any “goods, services, commodities, information technology, software, hardware, or other items” on behalf of Atlantic City; and
  • Veto meeting minutes.The state can veto minutes from the governing body and “any board, commission, or department” of the city. Copies of meeting minutes must be sent to the director of Local Government Services, who can approve or veto any action taken by the city.

In response to Atlantic City’s information and efforts to avert a state takeover, as well as Mayor Don Guardian’s epistle late last week to the New Jersey Department of Community Affairs, the Department, created to provide administrative guidance, financial support, and technical assistance to local governments, community development organizations, businesses and individuals, has scheduled the following agenda items for its meeting today:

11:15 AM City of Atlantic City
Atlantic – NJSA 52:27BB-87 0 Proposed Adoption of Municipal Budget

11:20 AM City of Atlantic City
Atlantic – NJSA 52:27BBBB-1 et seq. – Confirmation of Powers under Municipal Stabilization and Recovery Act. 

Under said Act, the Commissioner of the Department of Community Affairs has 150 days in which to approve or reject the city’s five-year plan. Should the Department find that the proposed plan failed to achieve fiscal stability, a state takeover would take effect. Moreover, the statute also provides authority for a state takeover if Atlantic City, at any point, fails to follow the five-year plan—although it permits Atlantic City the right to appeal the Commissioner’s decisions to a Superior Court judge.

In its 25-page document, as we previously noted, the city sought to respond to the criticisms of the state to its report and urge that the city’s proposed plan is the best way to address its fiscal future. The timing, one day after the Presidential election, is mayhap ironic, coming after last week’s closure of candidate Donald Trump’s Taj Mahal casino—one he once called “the eighth wonder of the world,” despite, ironically, taking his Atlantic City casinos through bankruptcy four times. Nevertheless, he last week said: “There’s no reason for this,” in a recent interview as his friend and fellow billionaire Carl Icahn prepared to close the casino. Thus, in another blow to the city’s tax base and employment and other sales and hotel tax revenues, the Taj Mahal closed its doors amid a strike by union members that had lasted more than 100 days, making it the fifth Atlantic City casino to close since 2014. Mr. Trump claimed both sides should have been able to work out an agreement to keep the casino open. Local 54 of the Unite-HERE union had gone on strike July 1st, after the Local was unable to agree with Mr. Icahn on a new contract to restore health insurance and pension benefits—benefits which were terminated two years ago in a federal bankruptcy court. So last August, Mr. Icahn decided to close the casino, stating it lacked a “path to profitability.” That path, according to candidate Trump, is now forever closed: “Once it closes, it’s too expensive to ever reopen it.” The casino’s closure of course impacted Atlantic City’s fiscal challenges: its impact in lost jobs (nearly 3,000 workers—bringing the total jobs lost by Atlantic City casino closings to 11,000 since 2014), reduced assessed property values.

New Hands at the Tiller. Stockton City Councilman Michael Tubbs appeared certain this morning to become Stockton’s first black mayor after vaulting to a resounding lead over incumbent Anthony Silva in an election upsetting night across the country. At the age of 26, the Mayor-elect of the formerly bankrupt city stated: “We have a great opportunity to show the nation, How do you reinvent yourself? I’m tired of talking about where we’ve been. I’m more interested in talking about where we’re going. We have to mature as a community and start demanding solutions.” Outgoing and defeated former Mayor Tony Silva said: “The people have spoken…I respect the will of the people. I want to thank everyone who believed in me and stood by me…My heart will always belong to Stockton. I will always be remembered as the People’s Mayor and I will support the new mayor and I will ask my supporters to also support him and help us make Stockton an amazing city.” Mayor-elect Tubbs’ victory margin was an overwhelming 40-percent. In his acceptance speech, Mayor-elect Tubbs noted: “You don’t get 70 percent of the vote out of nowhere…This victory is yours and ours. This room is what Stockton looks like. It’s people from gated communities and Conway Homes, black people, Asians, white people. Each of us is what it will take to move Stockton forward.” Indeed, it is a remarkable pinnacle for the new Mayor-elect, who was raised by a single mother in south Stockton, earned his bachelor’s and master’s degrees from Stanford University and was elected to the Stockton City Council in 2012. The new Mayor noted, last night: “Stockton has a long history of turning tragedy into triumph…The Stockton I know, I met in this campaign…I am more resolute than ever that Stockton’s best days are ahead. This is a prelude to a beautiful chapter. Michael Tubbs will not write it himself. We will write it together.”

Hard Choices for Municipalities

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eBlog, 11/03/16

Good Morning! In this a.m.’s eBlog, we visit Petersburg, Virginia, where the beleaguered city is under new management—management which yesterday unveiled troubling evidence of how significant a fiscal hole confronts the small municipality’s future. Then we return to the nation’s East Coast former gaming capitol—Atlantic City—where, in the wake of the state’s announced takeover of the city, questions abound to just what that means, whether the city will sue to bar such a takeover, and how such a takeover might manifest itself. Finally, we head west to Stockton where, yesterday, a Councilmember vying next Tuesday against the incumbent Mayor announced he had been endorsed by the President. Wow.

Citizen’s Trust in its Elected Leaders? Former Richmond City Manager Robert Bobb laid out his firm’s short-term plan to deliver Petersburg from financial peril on Tuesday, a week after taking command of the city’s beleaguered administration. Advising the City Council that the city lacked adequate fiscal resources to operate through this month, Mr. Bobb demonstrated to the Council and audience a photo of fat stacks of unsent municipal checks—not awaiting stamps, but rather sufficient funds—necessitating, he warned, in the near term that the city triage debts, adding that even as unmet bills are piling up, so too are expensive legal challenges. Nevertheless, after criticizing what he described as a lack of transparency surrounding the city’s financial challenges, he drew applause when he followed up by stating: “This is not rocket science, we can make this happen.” Prior to the session, Petersburg City Treasurer Kevin Brown said he could not provide a reporter with tax collection revenues from last year, nor give an estimate of where collections were anticipated to be at this point in FY2017, stating that all he had were the revenues tallied by Dironna Moore Belton, Petersburg’s transit manager, who had served as the municipality’s interim city manager for eight months.

The exchange came as the Council agreed to permit the Bobb Group to negotiate with lenders in an effort to remain solvent through the end of this month—albeit the proposal, coming in the wake of steep cuts in municipal workers’ salaries, cancellation of the city’s summer youth program, and cutting deeply into the budget of Petersburg’s underperforming schools would be, as Councilwoman Treska Wilson-Smith warned, challenging: “We’ve been doing this for years to help our cash flow, but our financial advisers had recommended we lessen our reliance on this type of thing.” Councilmember Wilson-Smith and the remaining council members ultimately voted to allow negotiations to move forward. For his part, Mr. Bobb said his firm had struggled in an effort to find evidence of corrective action taken by the city’s leadership in response to increasing problems he traced to 2009: “The deficit from a cash standpoint cascaded to where we are today…It’s just basic research in trying to find: How did we get where we are?” He added that Petersburg’s leaders failed to act last March when the city’s financial advisers “basically said that the city’s house is on fire,” adding that, at that stage, the answer should have been: “Do something; take some action,” as he vowed that a fuller blueprint for moving the municipality forward would be delivered within a month. (Under his contract, the virtually insolvent municipality is obligated to an initial five month contract of on-site assistance at a cost of $350,000, plus up to $25,000 in expenses under a contract executed last week under emergency hiring rules.)

As the city sputters toward a promised comprehensive solution to its financial challenges, residents increasingly frustrated with the city’s administrative dysfunction continue to take matters into their own hands. Last week, local lawyer Dale Pittman and other members of a committee that oversees Petersburg’s public law library filed a lawsuit against the city over a possible misuse of funds. Historical preservation advocates are crowdfunding a $50,000 campaign to staff museums shuttered as a cost-saving measure last month. The membership of a government accountability group whose leaders are a vocal presence at City Council meetings has ballooned to more than 1,830 members online—with an organizer of that group, Clean Sweep Petersburg, challenging audience members at this week’s session to remember that the city’s residents have the ability to hire and fire Council Members, noting: “I’m looking at tonight as the last meeting before you know some different team members will be part of this Council,” she wrote, referring to Election Day next Tuesday. This week’s Council session commenced behind closed doors with a 35-minute session to discuss “matters related to litigation.” In the public session, the meeting came with a warning—or, as Petersburg resident Cory Harris told the elected officials: “We are not your enemy, we just want to be heard…You cannot fix Petersburg without fixing the people, and the citizens of this city are angry, they’re frustrated, they’re confused.”

Saving Grace? Atlantic City Mayor Don Guardian yesterday—in response to the state’s announced takeover of the city, said the city would rework and resubmit the city’s financial-recovery plan to the state—a response which would, he noted, speak to what he termed “inaccuracies and misinformation,” as the city hopes to work with New Jersey Department of Community Affairs Commissioner Charles Richman—adding that the 150-day period provided by the state to form an acceptable recovery plan expires tomorrow. The Mayor added the city is prepared to go to court to bar a state takeover: “Having a plan in place allows the city to access bond markets at reasonable interest rates…We are appealing to the Commissioner to understand the critical nature of this plan and reevaluate it on the accurate backup information that we will provide.” The city’s response came as a spokesperson for the Department said New Jersey’s Local Finance Board will consider whether it should assume finance-related powers under the Municipal Stabilization and Recovery Act approved by lawmakers last May—a new state statute which authorizes the Local Finance Board to alter Atlantic City’s outstanding debt and municipal contracts, as well as sell city assets for a five-year period. The spokesperson, however, did not immediately respond for comment on what would happen if the city resubmits the recovery plan to the DCA or what the timetable is for deciding how much control the state may choose to exercise. The city has, ironically, been under state financial supervision since October of 2010, the year the state Local Finance Board, which oversees municipal budgets and finances, voted to put Atlantic City under financial supervision that gave the state approval over its annual budgets. Last year, the state took a further step when Gov. Christie appointed an emergency manager, who, theoretically was charged with assuming responsibility over Atlantic City’s day-to-day operations; however, his executive authority was amorphous at best. Unlike in Michigan, where state law authorizes an emergency manager to bar elected leaders from even meeting or taking any governmental actions, no such authority is provided under New Jersey’s statutes; therefore it is unclear whether New Jersey’s model provides any constructive means for a state to work with a fiscally stressed municipality to not only avert insolvency, but also to act as a coordinator between the state and municipality. Indeed, Atlantic City Council President Marty Small yesterday noted that six years of state oversight of by the state have proven ineffective, adding that the city’s elected leadership would continue to oppose what would be the state’s most preemptive interference with a local government in decades, adding: “The state has never had a plan, never will have a plan, and in their 75 pages of nonsense they didn’t offer a plan…All of the criticism that they had for the city government—the state has overseen every decision that we made in the city of Atlantic City since 2010.” Nevertheless, a spokesperson for the Department stated: “Commissioner Richman categorically rejects any claim that his decision was disingenuous, inaccurate, misinformed, politically motivated…It was a fair examination; the commissioner and his team stand by the decision.”

Moody credit rating agency analyst Douglas Goldmacher, who had praised the city’s proposed recovery plan, yesterday noted the negative response from the state to the city’s proposed plan left unclear how it would impact Atlantic City’s credit rating, mostly because it provided little information with regard to exactly how such a “takeover” would work, albeit adding: “The city’s financial condition remains extremely weak, and it will be difficult for it to make these payments without funding assistance from the state or other outside sources.”

Marc Pfeiffer, mayhap one of the most insightful and thoughtful experts on the state’s fiscal policies, who is a remarkable senior policy fellow and Assistant Director for Rutgers University’s Bloustein Local Government Research Center, notes that Commissioner Richman’s report raises legitimate concerns with regard to a number of provisions, including Atlantic City’s proposal to raise cash by selling its former municipal airport to its public water utility for $110 million, and he adds that Atlantic City leaders’ announcement that they intend to resubmit their plan to address the state’s concerns likely lays the groundwork for court action: “There’s been a chess game in play for about three years now and this is the next move: What we have is uncertainty, which unfortunately will continue for a while.” (It reminds one of the terrific Paul Newman line: “What we have here is a failure to communicate.”)Gordon MacInnes, President of the New Jersey Policy Perspective think tank, added that New Jersey’s record on intervention in Atlantic City is not a record which inspires confidence that a state takeover would work—adding a key concern: “Both the municipal and the state governments walked away from acknowledging the magnitude of the problem and working together to try to do something about it.”

What’s Next? The announced takeover opens the door to unprecedented state authority over Atlantic City’s affairs, including the right to:

  • dissolve agencies,
  • override decisions by elected local leaders, and
  • sell off assets, including land and a water utility coveted by private operators.

Commissioner Richman, however, offered no insights with regard to how the state intends to use that authority, with a spokesperson for the state agency stating that “the next step” will be up to the state Local Finance Board; however, she provided no timetable for a decision. The city’s 120-page proposal had proposed 100 job cuts, early retirement for some employees, a tax settlement with casinos, and a plan to sell the former Bader Field airport site to the city’s municipal utilities authority for $110 million, among other cost-saving measures.

Taking Election Stock in Stockton. Mayoral challenger Michael Tubbs yesterday announced he had received the endorsement of President Obama, a rare and possibly singular occurrence in Stockton political history. The President’s statement noted: “I am proud to endorse Michael Tubbs in his bid to become Stockton’s next Mayor…Michael’s service as a Councilmember illustrates that he understands the need for every Stocktonian to have safer neighborhoods, stronger schools, and a voice in the political process. His story is the American story, and Michael will work tirelessly to ensure that Stockton reaches its full potential.” Unsurprisingly, it seems unprecedented for a Stockton mayoral candidate to have received a presidential endorsement—especially against an incumbent mayor—in this instance, Mayor Anthony Silva. If Councilmember Tubbs wins, he will be Stockton’s first black mayor and its youngest mayor ever. The Councilmember was raised by a south Stockton single mother; he is a graduate of Franklin High School and, as is this blogger, a graduate of Stanford University. The Councilmember is not exactly new to the White House: he served a four-month internship at the White House in 2010, and, three years later, wrote to the White House seeking designation for Stockton by the federal government as a “Promise Zone,” albeit this was a wish ungranted.  

Can Municipal Insolvency Be Contagious?

eBlog, 10/24/16

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

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

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

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

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

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

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

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

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

 

How Might Next Month’s Elections Affect Municipalities’ Fiscal Futures?

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eBlog, 10/19/16

Good Morning! In this a.m.’s eBlog, we consider the fiscal challenges Detroit Mayor Mike Duggan is encountering which could interrupt the city’s recovery from the nation’s largest-ever municipal bankruptcy, but note the city’s continuing progress towards becoming a national center of innovation;  then we head east to the exceptional challenge and nearing deadline for Atlantic city if it is to have a future versus being taken over by the State of New Jersey; then we fly to the West Coast where next month’s elections will determine the future municipal status of San Bernardino—the nation’s city on the road to exiting the longest municipal bankruptcy in American history, before jogging north to Stockton—where the post-chapter 9 municipality has a difficult mayoral election, but also where voters will decide what kind of municipal governance they want. Finally, we look south to observe the first steps in Puerto Rico under the new PROMESA law to address the U.S. territory’s quasi municipal bankruptcy.

Demolition Derby? Detroit Mayor Mike Duggan this week disclosed the Motor City’s controversial demolition program had been suspended by the U.S. Treasury Department this summer to address “mistakes” and “errors.” The federally funded program, according to Mayor Duggan, had been at a standstill since the middle of August—as the city and Detroit Land Bank Authority met with officials from the U.S. Treasury and the Michigan State Housing and Development Authority to reach agreement on a new set of procedures—procedures accepted by the Treasury at the end of last week, albeit Mayor Duggan declined to cite specific examples of what went wrong, albeit noting: “No amount of error in the rules is tolerable…We’re going to eliminate those mistakes with these new controls.” The contretemps comes as the city’s demolition program has become the focus of a federal criminal investigation, related to issues involving bidding practices and soaring costs. Based upon its approval of the city’s new rules, the Treasury has officially released $42 million allocated for the city’s fourth round of the program, albeit, as Mayor Duggan noted: “They didn’t do it casually,” adding the city’s “land bank did not have sufficient procedures in place to make sure we had proper documentation for all the bills and didn’t have sufficient controls to assure Treasury would not be charged for ineligible expenses.” Among the changes, Michigan State Housing authority employees will now be embedded at the land bank, along with the Detroit Building Authority to provide compliance support, input, and on-site assurance “that all contracts are bid appropriately.” The housing authority will also conduct quality control audits to assure ongoing compliance. In addition, the land bank has established a $5 million escrow fund for any demolition costs not eligible for Hardest Hit funding. Or, as Mayor Duggan put it, he was “very disappointed” by some of the things he learned during the review, but said federal and state officials will disclose those “when they are ready.”

The Treasury last August instructed housing authority officials to suspend disbursement of federal TARP funds to Detroit for blight elimination, including payment of invoices received from the land bank with the state’s second and third funding allocations under the program. Treasury, in addition, asked the housing authority to halt approval of demolition and other blight elimination activities by Detroit or its affiliates. (Detroit has been awarded more than $258 million under the federal program—with which the city has razed more than 10,000 homes early 2014. The new federal allocation is part of $130 million awarded to the Motor City in recent months. Mayor Duggan noted the new rules are in response to concerns over practices as well as Detroit’s volume of demolitions, stating: “It’s a far more intense review, because we are handing far more demolitions…The speed at which we went outstripped the controls that we had in place.”

Detroit’s auditor general last year had commenced an audit of the city’s demolition activities at the request of Detroit’s City Council in response to growing apprehension with regard to soaring costs and bidding: last April, Detroit Auditor General Mark Lockridge confirmed his office received a federal subpoena after releasing preliminary findings from the months-long audit. Adamo Group, one of the program’s largest contractors, also was served with a subpoena from the Office of the Special Inspector General for the Troubled Asset Relief Program, as was the land bank and Detroit’s Building Authority. Last May, the FBI’s Detroit office confirmed it was also investigating the program, and Detroit’s Office of Inspector General has been conducting a review of its own into an aspect of the program. The city has said it is cooperating fully with all investigations. Nevertheless, this week, Mayor Duggan stated he had seen “no evidence of criminal activity,” but declined to comment on the federal probe. Nevertheless, the fiscal costs are tolling: Detroit has more than $80,000 in legal fees for the investigation—and now faces more. The city came under scrutiny last fall over a pilot program aimed at attracting larger players to rapidly take down larger bundles of homes. At the time, a WJBK-TV report accused city building officials of improperly meeting with contractors in 2014 to set prices for the bulk demolition work before requests for bids were official. The administration has said there was nothing improper about the set-price contract initiative, which was discontinued shortly after it failed to attract national players. Last October, the Michigan State Housing Development Authority reviewed the land bank’s bid selection process related to Hardest Hit funds and did not uncover any significant issues. The agency, which distributes the federal funding once invoices are reviewed, did. however, require changes to “further strengthen their selection of contractors.” Detroit’s demolition costs have soared from an average of about $13,600 per house in 2014 to about $16,400 last year—more than 25 percent. According to the city, those rising prices were tied in part to new environmental safeguards: today, the average residential demolition is $12,575 per house, according to estimates listed on the city’s website. Detroit only stopped its federally funded demolition over the last two months. It has continued doing 25-30 city funded demolitions per week, Mayor Duggan notes.

Innovating an Old City. Matt Simoncini, President and CEO of Southfield, Michigan-based supplier Lear Corp., officially opened its Detroit Innovation Center yesterday, calling it an idea to boost technological transformation for the company and a return to the city in which it was founded: to Mr. Simoncini, the near $10 million investment represents a pivotal moment in Lear’s trajectory as a seating supplier turned advanced automotive technologies developer; yet he also perceives it as a foundation to Detroit’s resurgence, noting: “This city is on the cusp of changing the world: Urbanization, mass transit, that’s all going to come out of this town. While other places, like Silicon Valley, have players in a big pond…We are the pond. Detroit is going to have an amazing role in our future. We’re going to be part of that.” The workers there will focus on next-generation automotive battery charging, seating designs and technology integration and non-automotive projects. He adds: “We’re at a pivot point: So much of the work we do sucks everyone in. If I can get those workers out of the mainstream at Lear (in Southfield) and leverage what the city has to offer, we can send big things up the food chain.” Noting he is working with Wayne State University and the College for Creative Studies to develop curriculum and provide opportunities for those universities’ students, he added: “We (the auto industry) haven’t fully utilized what the city, and its universities, have to offer: These universities are in our backyard. I’m surprised more (companies) haven’t rushed down here to access that talent and help drive innovation.” He also is focused on opening a manufacturing plant in the city: he has discussed creating jobs in the Motor City instead of Mexico if he could attain a new wage tier with the United Auto Workers that pays in the mid-teens per hour with some benefits. A specified pay rate and benefits would need to be negotiated and are subject to moving up or down, according to the company: Lear currently pays $35 per hour, which includes the cost of benefits, at its just-in-time seating plants and upward of $25 per hour at its component plants.  Mr. Simocini notes: “This is my hometown. Of course I want to be part of its success.”  

The Edge of the Boardwalk. Chris Filiciello, Atlantic City Mayor Don Guardian’s chief of staff this week confirmed that the city did not submit a revised budget to the state, as Mayor Guardian warned in a letter that a tax increase would be “devastating” for Atlantic City, which he said increased taxes by 50 percent over 2013 and 2014. With the debt clock from the state ticking, Atlantic City is now nearly two weeks past its deadline in violation of its $73 million state loan; the next deadline is just over two weeks away—by which time the city must submit a five-year fiscal stability plan. It appears the Mayor believes his five-year budget will save roughly $73 million by 2021, in no small part related to the sale of its municipal airport, Bader Field, and its water authority for $110 million. In addition, the City Council is slated to vote on new labor agreements between the city and its seven worker unions, as well as consider privatizing payroll services. Under Mayor Guardian’s proposed five-year fiscal recovery plan, the city projects $72.9 million in savings from 2017 through 2021 (Atlantic City has annual budget deficits of about $100 million before state aid.). In his statement, Mayor Guardian listed 26 items on which Atlantic City has or intends to cut costs and raise revenues, including 400 fewer full-time workers since 2013, a recent shared-services deal with Atlantic County, bidding out city services, and land sales worth $7.1 million. In addition, Atlantic City has offered early retirement buyouts to 165 senior workers. The plan anticipates saving $7.4 million next year; $12.7 million in 2018; $17 million in 2019; $17.3 million in 2020; and $18.5 million in 2021, according to Mayor Guardian’s statement. The city currently has a fortnight in which to submit its plan to the state—the rejection of which would result in a five-year state takeover. The Mayor described the plan as one which “will include increasing revenue, reducing costs, maximizing redirected funds from casinos, receiving state aid, restructuring of debt payments, early retirement incentives, realizing the value of City owned properties and the MUA, and much more, all while maintaining Atlantic City’s sovereign right to local self-governance.” Nevertheless, how the plan will fare in City Council remains uncertain: the Council has pulled or voted down measures to dissolve the authority five times amid pressure from residents to keep the authority independent. (The Council must approve the sale at two meetings. The sale is also subject to state approval.) In addition, the Council will vote on seven memorandums of understanding with its police, fire, white-collar, blue-collar, electrical, and supervisory employees—with, according to Mayor Guardian, the city renegotiating contracts to include multiple years with no wage increases, restructured pay scales, health care cuts, and reduced overtime and paid-leave costs.

Getting Back to Fiscal Recovery. San Bernardino, the California municipality seeking to become the first U.S. municipality to overhaul its political structure while in chapter 9 municipal bankruptcy, and asking its voters next month to approve a new charter that strips the Mayor and city council of day-to-day operational control, has completed all of its required audits for the first time in six years, with the City Council having this week filed its FY2015 final audit, marking the first time since 2010 the city has all of its legally required audits. The FY2016 audit is due by March 31, 2017, a deadline the city will meet, according to Finance Director Brent Mason—albeit the audits were “qualified”—denoting the auditors were unable to find enough evidence the financial statements were accurate in four of 10 areas, leading Councilman Henry Nickel to note: “This is a job well done, but now I think the next step is implementing some corrective actions to get back to where we need to be.” Part of the challenge for the city stems from the 2012 state-mandated dissolution of the city’s redevelopment agency, requiring a significant expansion of the audit, or, as Mr. Mason notes: “They’re not small-ticket issues to get our hands around, but they’re all doable.” One of the qualified opinion concerns was with regard to the liability for compensated absences, such as vacation and sick time, which San Bernardino has proposed adjusting as part of its bankruptcy exit plan—a plan which appears to have the qualified approval of U.S. Bankruptcy Judge Meredith Jury.

Taking Stock in Stockton. Just four years ago, then Mayoral candidate Anthony Silva rode the city’s misery to an easy upset victory over incumbent Mayor Ann Johnston: the city was insolvent, in chapter 9 municipal bankruptcy, and besieged by violent crime. Now, as he ends his four-year term and faces re-election, Mayor Silva is himself confronting not just serious personal charges, but also serious crime. Unsurprisingly, he is being challenged by City Councilman Michael Tubbs, who believes the city’s mayor should be an “ambassador” for the city: he vows, if elected, that he will use the “bully pulpit” to showcase Stockton’s assets, like University of the Pacific, the Delta, the city’s proximity to the Bay Area, and its inexpensive real estate. He says Stockton is well-positioned to attract companies looking to expand in California; he also says he will maintain an open line of communication with the media to ensure awareness of the city’s accomplishments. Councilman Tubbs is seeking to become Stockton’s first black mayor and its youngest mayor. Unsurprisingly, the Mayor who was in charge when the city emerged from municipal bankruptcy, Mayor Silva, wants to be the city’s first two-term mayor since Gary Podesto left office at the end of 2004.

As we have noted, however, Mayor Silva’s tenure has, especially this election year, been marked by controversy, most recently a revelation that a gun stolen from him was used in the unsolved killing of a 13-year-old boy—followed almost immediately by allegations that he secretly made an audio recording of a strip poker game involving naked teenagers and provided alcohol to minors—even as he was serving concurrently as Mayor and CEO of the Boys & Girls Clubs of Stockton. But Councilmember Tubbs is confronting his own high-profile controversy: two years ago he was arrested by the California Highway Patrol for driving under the influence; he publicly apologized within days and pleaded no contest to the charges two months later.

A key issue for this post-bankruptcy city’s future could be governance: Mayor Silva has long claimed that Stockton residents would be better served by a governance system that provides more power to the mayor; he has previously advocated working to put a “strong mayor” ballot initiative before voters; he has never followed through, however. Unsurprisingly, Councilmember Tubbs disagrees, stating: “Stockton is incredibly blessed that we don’t have a strong mayor city…If you had a strong mayor city, your police chief would be gone…a lot of your staff would be gone. And the city would be run not with any thought, but be run based on the whims and feelings and ego of one central figure, which is incredibly dangerous.” These are not their only differences which the voters will have to consider: a key difference is Mayor Silva’s statement of nearly a year ago:  “The government of Stockton does not work…If you’re frustrated by why things haven’t changed, every day of my life is the same. Everything I’ve done, I’ve done without their help.” The election promises to be close: last June, Councilman Tubbs prevailed in the eight-candidate primary with 33.4 percent of the vote; Mayor Silva finished second with 26.4 percent.

Federal Oversight Governance in Puerto Rico. The Puerto Rico Oversight Board directed six of the U.S. Territory’s public entities to develop and present fiscal plans: the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC), and the University of Puerto Rico, having voted unanimously to tack on additional oversight responsibilities for itself to include some 24 island public entities—all as part of an emerging effort by the federal oversight board to create a ten-year plan. The Board’s Executive Director, Javier Quintana noted: “PREPA is beginning the process of preparing the fiscal plan as required by the Oversight Board: According to PROMESA, the fiscal plan should span at least 5 years. Because the Oversight Board has not yet set a deadline, PREPA does not know when it will be required to be completed.” In addition, the board barred all governmental covered entities from carrying out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or municipal bond sales. Board Chairman José Carrión, in the wake of Gov. Alejandro García Padilla’s presentation of Puerto Rico’s fiscal plan to the PROMESA board, the board would “confer with him about the central government and instrumentality plans…Then the board will seek public comment and consult with the government about the schedule for bringing their plans to eventual approval and certification,” in the wake of which the board will give the Governor a schedule for the process of submission, approval, and certification of the fiscal plans. The Puerto Rico Oversight Board also directed the Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, Puerto Rico Highways and Transportation Authority, Public Corporation for Supervision and Insurance of Cooperatives (COSSEC)—six of Puerto Rico’s twenty-four public entities, and the University of Puerto Rico to put together plans—albeit without any explanation of why that specific six. Under the newly signed Congressional PROMESA law, the fiscal plan should span at least 5 years. Finally, the board ordered all of its covered entities to not carry out what it termed “out of the ordinary” financial transactions without prior board approval, including debt transactions or bond sales.

Voting on a Municipality’s Future

 

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eBlog, 9/16/16

In this morning’s eBlog, we consider the upcoming election in San Bernardino on what form of municipal governance the city’s voters want for their post-municipal bankrupt municipality; then we head East to Michigan to listen to Mayor Duggan and ponder on how very perilous and challenging the path out of municipal bankruptcy can be; before heading still farther East to inquire whether Atlantic City even has a future as a city—or will, instead, be taken over by the state. After which, we turn right back around to Ohio—where the fate of East Cleveland is very, very much in question: no one seems to have an answer—and the silence from the State of Ohio has been deafening. Finally, we fly south to the U.S. Territory of Puerto Rico—albeit, really to the nation’s Capitol, as U.S. House and Senate members struggle to consider how federal policies and actions could play a vital role in the island’s long-term economic future.

Voting on a Bankrupt City’s Future. Unlike November’s election farther north in Stockton, where the vote will be over which elected leader the voters will elect to keep that city on the road to recovery, voters in what could be post-chapter 9 San Bernardino will be deciding whether to adopt a new city charter [If approved by a majority of voters Nov. 8, Measure L will replace the existing charter with the 14-page new charter.] under which to operate in the wake of U.S. Bankruptcy Judge Meredith Jury’s upcoming confirmation hearing on October 14th with regard to the decision to approve the city’s plan of debt adjustment—albeit, as San Bernardino City Attorney Gary Saenz yesterday said, the city anticipates receiving a confirmation order from Judge Jury by the end of the year with an effective exit date around March. The municipality’s creditors had been projected to vote on the city’s plan of debt adjustment earlier this month; however, CalPERS and U.S. Bank each filed extensions seeking more time to vote, even as attorneys representing Ambac Assurance Corp., the insurer on $52 million in pension obligation bonds, have voted in favor of the exit plan contingent on finalizing what it called in a court filing “the definitive documents.” Or, as City Attorney Saenz notes: “It is all contingent on how things go…Voting has come in overwhelmingly in support of the plan, which helps with regard to confirmation.” Mr. Saenz added: “We are working on resolving the smaller cases, such as personal injury claimants, trip and falls, and a case involving one of our police officers…The more of those we settle, at this time, helps with respect to confirmation.” With regard to the city’s bigger creditors, he notes that when CalPERS files today, that could be a significant milestone, albeit the huge state retirement agency reached an agreement in substance with San Bernardino more than a year ago; and an agreement with pension bondholders in May. U.S. Bank, which holds several million dollars of commercial paper issued against city buildings, also had previously reached an agreement with the city. With regard to reaching an agreement with the city’s municipal bondholders, Mr. Saenz has previously noted the city was able to offer them 40 percent of what they are owed, rather than the measly one percent it had originally offered—in large part because the agreement also stretches out payments 20 years—an important score, as the city plan of debt adjustment is keenly focused on a long-term plan to make sure it does not make a round trip down the road back into chapter 9—an agreement, too, very much intended to gaining Judge Jury’s affirmation that the city’s pan is both feasible and dependable. Or, as Mr. Saenz notes: “One thing Judge Jury will look at is the feasibility of the confirmation plan…We believe we found a model that is dependable.” The proposed debt adjustment plan pension obligation bond agreement appears to—similar to the outcomes in Central Falls, Detroit, etc.—continue a trend of municipal bondholders faring worse than public pension obligations—albeit the powerful role of CalPERS is profoundly different than in Alabama, Rhode Island, or Michigan. Under the proposed, current proposed plan, Commerzbank Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, agreed to drop their opposition to San Bernardino’s plan of debt adjustment—under the pending resolution, the holders of $50 million in pension obligation bonds will receive payments equal to 40 percent of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.

Thus, in San Bernardino, the future will not be about whether there will be a future, but rather how—and what structure or form of municipal government it will be—or, rather the form of municipal governance. Indeed, last night, John Longville, one leader of the campaign in favor of Measure L, which would repeal San Bernardino’s existing charter and replace it with a new one created by a citizen committee, said such a new charter would promise the way to end decades of destructive political infighting rather than a surrendering of self-government. Mr. Longville, who comes with no small record—he is a former Mayor of Rialto, California Assemblyman, and the current President of the San Bernardino Community College District Board of Trustees that, like other jurisdictions in the region, San Bernardino has had a variety of leaders over the years, and the city has been affected by the same economic blows, including the loss of a major steel plant and a major Air Force Base—but, he pointedly noted, those cities did not file for chapter 9 municipal bankruptcy; in fact, he said they have been thriving, he said: “We see neighboring cities able to function better than we are…It’s just the reality. Some of them quite well. Why is San Bernardino functioning so poorly?” His answer? He told his audience the reason was the city’s 46-page charter first passed in 1905 and amended no less than 135 times since then. It was that history, he noted, which makes it unclear who is responsible for fixing problems and, therefore, breeds arguments.

In contrast, his debate opponent, James Penman, San Bernardino’s City Attorney from 1987 until 2013, countered that if San Bernardino’s charter were responsible for the city’s longest ever municipal bankruptcy, then the city would have gone bankrupt, as other cities did, during the Great Depression. “The city charter is not the reason for the bankruptcy. Poor leadership on the part of certain elected officials and certain appointed officials is the reason we went bankrupt,” pointedly reminding voters of the $4 million general fund reserve San Bernardino maintained when former Mayor Judith Valles left office in 2006,, as he added: “You can’t spend more money than you take in and not go bankrupt.” He told the audience the arguments at City Hall were not with regard to lines of power, but rather over issues officials were elected to address. The culprit, Mr. Penman maintained, has been the new charter’s elimination of elections for city attorney, city clerk, and city treasurer, and to its shifting of some responsibilities from an elected mayor to an unelected city manager: “The new charter takes away your rights and your leadership in electing City Hall,” he said, arguing that it is important those positions be directly responsible to voters, rather than to City Council members who would appoint them under the new charter.

But his opponent countered that in the century since the charter was passed, city government had become too complex to expect elected officials to understand it fully the day they are sworn in: “When I was mayor of Rialto, I was proud of what I did and I think I did a pretty darn good job…But when I first came in there was sure a lot that I didn’t know, and I was glad there was a professional city manager, as there is in almost every city in California.” Interestingly, Mr. Penman countered that following that argument to its logical conclusion would mean the state Legislature should choose the Governor and Congress should choose the President, since running the state and federal government also requires great expertise. He added, moreover, that an elected city attorney helps prevents scandals like those in Bell, Moreno Valley, and Beaumont.

347 miles north of San Bernardino, however, where there will also be elections in November—those elections will not affect Stockton’s city attorney, police chief, city clerk, or auditor: Stockton’s City Council charter review committee last year voted unanimously to reject a proposal by a citizen’s commission that could have given voters the chance to decide if the police chief, clerk, and auditor should have to run for office. Current candidate for re-election, Mayor Anthony Silva, had opposed the recommendations, warning: “Can you imagine getting ready for these upcoming elections (as a mayoral or council candidate) and in the middle of it our own clerk has to go out and start putting up signs for herself and then worry about her own election?…It would be chaos.”

The Hard Road out of Municipal Bankruptcy. Detroit Mayor Mike Duggan yesterday in an address during the third Detroit Homecoming, a special program created to attract ex-Detroiters and investors to come back home praised a recovering municipality from the nation’s largest chapter 9 bankruptcy with a call to entrepreneurs who have left to “come on back home.” Mayor Duggan spoke about improved service delivery, home values, and demolition efforts that are boosting many city communities—even as the Census Bureau reports that the city’s unemployment rate remains the highest in Michigan and newly released U.S. Census estimates rank Detroit the nation’s poorest major city. Mayor Duggan, in a city where the city’s schools are under the control of a state-appointed emergency manager and a state-created dual system of charter versus public schools, added: “The solution to poverty is jobs and making sure that our residents have the education and skills to take those jobs.” The Mayor’s remarks came as part of this long-term effort which began two years ago to help bring more than 300 ex-patriots with ties to Detroit “home” to re-experience the city—an effort which, to date, has resulted in committed investments of more than $260 million in city projects and businesses. Nevertheless, the new Census estimates underline how steep this road to recovery is: the U.S. Census American Community Survey reports that Detroit realized no change in poverty or incomes; an estimated 39.8 percent of its residents are below the poverty line. Nevertheless, as Mayor Duggan noted, a key measure, unemployment, has improved measurably: Detroit’s unemployment rate was 17.8 percent when he took office in two years ago in January; it was 12.5 percent by last July—or, as he put it: “We have 15,000 more jobs today than we did three years ago…Nobody is declaring victory, but we are making progress in a whole lot of neighborhoods in the city, and we have a lot more neighborhoods to go.” Mayor Duggan added, in another key issue to the city’s recovery, that since spring 2014, the city has razed more than 10,500 vacant houses, and is averaging the razing of 150 commercial buildings each year—and the results are encouraging: in some neighborhoods, he said, home sale prices are up more than 50 percent from two years ago.

Mayor Duggan expressed less confidence on the school front, noting he continues to be concerned over the so-called state rescue package for Detroit’s public school district that pays off $467 million in operating debt and provides startup funding for its new debt-free district—a package, however, which created a divided school system of charter and public schools, so that the city lacks uniform standards for all schools—and for all its children: “We’ve got to come back at it. We’ve got to get it fixed.” It is, as the Detroit News has opined: “a major American city where public education, namely the teaching of its young, is corrupted by grasping adults and mismanaged by state bureaucrats who seize control of a system they fail to fix…And not the fact that public education in Detroit, a necessary building block for any functioning democracy, is a disgrace and an indictment. Its recurring incompetence is a disincentive to families with school-aged children, households that form the bedrock of stable communities occupied by taxpayers and law-abiding citizens…The wonder is that it’s taken this long for prosecutors to root out corruption, or for someone to file a civil rights lawsuit against the state and whoever else for the generally deplorable state of Detroit’s public schools…This is a fundamental hurdle. Jobs in Detroit go wanting for Detroiters if their DPS secondary education fails to give them the skills to compete, and if folks refuse to recognize that education also needs the active participation of parents, students, even the business community.” Characteristically moody Moody’s credit rating service clearly shares Mayor Duggan’s apprehensions: the service worries that uncertainty over the future security of Detroit Public Schools state-aid backed bonds, its governance, as well as the poor arithmetic of tax collection issues in the wake of the state restructuring of DPS following the district’s restructuring merit a downgrade from “developing” to “negative,” deep in proverbial in junk territory, albeit advising the rating, like any student’s grade, could move in either direction once various issues tied to the state preemptive restructuring of DPS is resolved, adding that the further uncertainty over the outcome of a restructuring of limited tax state aid revenue bonds is a key concern—and noting that it moodily awaits the toting up of property tax collection trends and the success or failure of the eventual transfer of DPS’ governance from emergency management to a voter-approved Board of Education.

The Future or Un-future of a Great American City. Atlantic City, having now missed its deadline and violated the terms of a $73 million state loan, has asked the state for a “reprieve” on the matter—the deadline was one which required the city to initiate dissolution of its Municipal Utilities Authority—meaning that, as of today, the city is at the mercy of the state, which could ultimately demand immediate repayment of the loan or seize the city’s collateral. One of the terms in the July 29 bridge loan agreement called for the city to dissolve Atlantic Municipal Utilities Authority (ACMUA) by yesterday or use the water authority as collateral in the case of a default—a state demand the City Council has been unwilling to support: ergo, having defaulted under the loan terms, the state could demand immediate repayment of the monies. In a statement Wednesday, Mayor Donald Guardian noted: “Although the September 15 deadline will pass tomorrow without a city council resolution dissolving the MUA or designating it as collateral in case of default, we have asked the state for a reprieve on this because we believe that the MUA will actually be a better part of the overall financial solution if it is kept whole.” For its part, a New Jersey Local Finance Board spokeswoman had responded: “A decision has not been made and the Division is awaiting legal guidance as to its options.” The city had already been moodily downgraded last April, as we have reported, because of the difficult governance situation—a situation in which the city is under a state emergency manager who has been invisible, as well as a governance situation where the MUA is financially independent from the city—a utility estimated by New Jersey Senate President Steve Sweeney (D-Gloucester) at around $100 million—part of the reason Mayor Guardian has made clear, especially given its vital public safety role, that he would like to bring the MUA under city control and opposes privatization or a public-private partnership. The city, to some great extent caught between the rock and hard place of the Governor and the legislature, had averted a default in late May when the legislature approved a rescue package giving the city 150 days in which to deliver an acceptable five-year financial turnaround plan; however, if the plan is not approved by the early November deadline, state intervention kicks in with New Jersey’s Local Finance Board then empowered to alter debt and municipal contracts—that is, a different plan than insisted upon by Gov. Chris Christie. Indeed, on the 150 day calendar, Mayor Guardian notes: “Our 150-day plan is moving forward quickly, as we have some of the best in brightest minds in the country working on our behalf to solve this problem…We just need the time to finish the plan and to present it publicly. In the end, we think this will be the best plan to move Atlantic City forward while at the same time maintaining our sovereignty and decision-making rights now held by locally elected leaders.”

Governance & A City’s Future. East Cleveland, Ohio Mayor Gary Norton will face a recall vote in December, one that comes at a time of perilously depleted city coffers and a thick layer of political tension; so too will City Council President Tom Wheeler—or, as Mayor Norton notes: “This is a horrible expenditure of funds given the city’s current financial provision, and beyond that, switching a single mayor or single councilman will have no impact on the city’s financial situation and the city’s economy.” The small municipality, still, like Godot, awaiting a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, and awaiting potential negotiations from the neighboring City of Cleveland whether there would be a willingness to negotiate its incorporation into Cleveland, now also awaits the decisions of its citizens in November’s election—an election with a $25,000 price tag the city can ill afford.

A U.S. Territory’s Fiscal Future. The Congressional Task Force on Economic Growth in Puerto Rico has been meeting with federal agencies and gathering input from some 335 organizations and individuals as it works to develop recommendations with regard to how to address the U.S. territory’s struggling economy—that is a wholly different group than the PROMESA oversight board (Chair Sen. Orrin Hatch (R-Utah), Sens. Robert Menendez (D-N.J.), Bob Nelson (D-Fla.), and Marco Rubio (R-Fla.), and Reps. Pedro Pierluisi (Puerto Rico), Tom MacArthur (R-N.J.), Sean Duffy (R-Wis.), and Nydia Velázquez (D-N.Y.) —one charged here by Congress to release a report by the end of the year on the impediments in current federal law and programs to economic growth in Puerto Rico along with recommended changes which could spur sustainable long-term economic growth, increase job creation, reduce child poverty, and attract investment to the U.S. territory. In its first joint release, the task force noted: “Residents of Puerto Rico and their families face numerous challenges to economic growth along with many dimensions affected by federal law and programs, including health care, government finances, economic stagnation, population loss, and sectoral inefficiencies…[We] are actively working to arrive at a consensus in order to provide Congress with findings and recommendations as called for under PROMESA.” The task force will continue accepting submissions from individuals until the middle of next month, having extended its previous deadline of September 2nd; the task force also said in its report that its members have been working with the Federal Reserve Bank of New York, which oversees Puerto Rico in the Federal Reserve System, and which recently provided a superb update at the City University of New York session convened to identify useful economic and financial developments in Puerto Rico and to analyze the Commonwealth’s economy and finances. The New York Fed has been providing not only useful reports and insights, but also blogs—and is now aiming to explore ways that federal statistical products used to measure economic and financial activity in the states could be applied to Puerto Rico. The task force is expecting help from the Joint Committee on Taxation (JCT), the Congressional Budget Office, and the Library of Congress’s Congressional Research Service. JCT will provide a briefing in the near future to discuss federal tax policy as it applies to Puerto Rico. The eight-member body will also consult with Puerto Rico’s legislative assembly, its Department of Economic Development and Commerce, as well as representatives of the private sector on the island.

What Will the Tides of November Bode for Struggling Cities’ Futures?

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eBlog, 9/09/16

In this morning’s eBlog, we consider the tightening noose around Atlantic City’s fiscal future as a state takeover looms. We consider the grim political and legal complications in post-chapter 9 Stockton, where a criminal trial of the incumbent Mayor who helped steer the city out of municipal bankruptcy looms just weeks before his campaign for re-election. What might it augur for the recovering city’s fiscal fate? Then we head east to Detroit, where elections of a very different sort will be on November’s ballot for a perspective from the Mayor on key ballot issues; finally, we consider the inability to achieve any clarity or resolution with regard to the fiscal fate of nearly fiscally and politically insolvent East Cleveland.  

A City on the Road to Nowhere? The Atlantic City Council has failed to accede to state terms and vote to dissolve its Municipal Utilities Authority, moving the city closer to default—the non-vote occurred after discussion in executive session, where, according to Council President Marty Small, there was insufficient support to reintroduce the requisite authority-related measures. Because the Council did not vote Wednesday evening, the municipality is nearly certain to violate the terms of its $73 million state loan—a loan which made the authority’s assets collateral and required the city to adopt an ordinance by next Thursday—and dissolves the authority if the city does not pay back the loan. The ball now moves to the state, which, under the terms, could then demand immediate repayment of money loaned to date. The city would be unable to repay the loan at this time, putting the authority at risk of monetization by the state, as we had noted from the op-ed Council President Small and Mayor Don Guardian wrote last Monday—or, as Council President Small put it: “It’s sad to say, but whatever the state does, we deserve…People didn’t take it seriously. They missed meetings. They claimed meetings were illegal.”

For the citizens of the beleaguered city, their future is unclear: they packed Council chambers Wednesday: some urged the Council to rescind a July 28 resolution that authorized the loan—a request which Councilman Frank Gilliam so motioned, in the wake of which Council voted 5-3-1 to support; however, Legislative Counsel Robert Tarver later said the measure needed a two-thirds majority to pass since prior notice of the vote had not been given; moreover, he noted that Council cannot rescind the resolution, since the state already performed on the agreement by loaning the city money. As in the old expression “misery loves company,” the actions have also triggered a pending lawsuit against the city, which seeks to void the resolution; the suit asserts a two-thirds majority of the full council was needed to pass the resolution, since it was an “emergency appropriation.” No matter what such future court battles might mean, however, the new reality is that the city’s inability to act means the state can demand it immediately pay back the $73 million loan—a demand the city cannot fiscally meet—but funds the city desperately needs if it is to meet the state-imposed November deadline to develop and submit a five-year fiscal plan to avoid a state takeover.

A Most Uncertain Road out of Municipal Bankruptcy. California Superior Court Judge Leslie Nichols has set an October 18 date for the trial of incumbent Stockton Mayor Anthony Silva—a candidate for re-election in November, where he is being challenged in his bid for a second term by City Councilman Michael Tubbs. The Mayor was arrested last month on charges he participated in and illegally recorded an alcohol-fueled game of strip poker with teenagers in 2015 at his annual summer youth camp in Silver Lake. His attorney reports the Mayor has no intention of dropping out of the race, noting: “That would never happen, for a really good reason…He is the People’s Mayor. He works very hard for the people of Stockton. I don’t think anyone would dispute that he gives every part of himself to being the Mayor of Stockton. He should be re-elected based on the merit that he gives the city.” The Mayor pleaded not guilty at his initial court appearance last month, complaining he is the victim of a political smear campaign being waged because he is a “threat” to Stockton’s establishment; nonetheless, it will be a jury which determines his fate with regard to the felony charge for allegedly making the audio recording without the consent of the strip poker participants and three misdemeanors related to the alleged providing of alcohol to underage drinkers.

A Motown Post Municipal Bankruptcy Future & Community Benefits. While Stockton’s post-chapter 9 recovery appears clouded by the looming criminal trial of the Mayor who was in office throughout his city’s long and arduous adoption of a plan of debt adjustment and emergence from municipal bankruptcy, his counterpart in Detroit, Mayor Mike Duggan, elected in the wake of the Motor City’s emergence from municipal bankruptcy under Michigan’s law, under which—in sharp contrast to California—the Governor had appointed an emergency manager, Kevyn Orr, who barred the city’s former Mayor and Council of any governance authority. Now Mayor Duggan is voting for what he calls the more manageable version of two proposed ordinances requiring “community benefits” be provided by would-be developers. In discussion with reporters and editors from Crain’s, Mayor Duggan warned that if a community benefits ordinance proposed by Rise Together Detroit passes in his city’s November general election, it would “guarantee we never see a (new) auto parts plant in this city again,” because of the requirements it places on developers: “Getting manufacturing jobs in the city will be over if Proposal A passes.” Mayor Duggan made clear he intends to vote for Proposal B, which is the alternative proposed community benefits ordinance.

Proposal A, put together by Rise Together Detroit, would require that projects of $15 million or more which receive $300,000 or more in city actions such as tax abatements or incentives enter into a legally binding community benefits agreement with a group of “representative residents, businesses and nonprofit organizations” within the “host community,” based on U.S. Census tract information. Such agreements would specify what the developer would provide to the community in which the development is located, such as education and land use programs, local small business and resident inclusion, and participation in the project. Environmental protections could also be considered community benefits—albeit, as the mayor noted: “You’d have to send a notice to the city clerk…The clerk and the council somehow contact people in the surrounding Census tract. Those people somehow form a committee, but Proposal A doesn’t say how they form a negotiating committee, doesn’t say how many people are on the negotiating committee. They could be negotiating with 50 or 100 people. It doesn’t say how long the negotiations go on, if they go on months or even years. If the site happens to be near the city border, the neighboring Census tracts would include the suburbs and you could have suburbanites who would get to say no to a development in Detroit.”

In contrast. Proposal B, which was developed by Detroit City Councilmember Scott Benson, appears to offer a less onerous alternative to Proposal A: it would mandate community benefits agreements for developments of $75 million or more and receiving $1 million or more in public incentives or on property with a cumulative market value of $1 million or more that was sold or transferred to a developer. In his conversation with the paper, Mayor Duggan made clear his comments were not a public endorsement of Proposal B; however, he noted there are compelling arguments toward the idea of institutionalizing these agreements for large projects: “Endorsing suggests a level of public campaigning that is different than a personal decision. But right now, I’m going to vote for it.”

In his comments, Mayor Duggan also addressed other pressing issues in his city, including on the pressing issues of the city’s struggling schools. Noting that while enrollment numbers will not be officially disclosed for about a month, Mayor Duggan said he would not discuss any new initiatives between the city and the Detroit Public Schools (DPS) until there is further certainty with regard to how many students the district has—that is, until there is a better sense whether DPS has emerged from its crisis mode, noting the serious “truancy issue in the city that we need to deal with.” With regard to the related Detroit Education Commission, a contentious sticking point in the DPS bailout legislation passed by the GOP-led Legislature and signed by Gov. Rick Snyder this past summer, the Mayor made clear he is not finished with pressing the issue: “To get things through a Republican Legislature, I need allies in addition to the Governor. I’ve learned my lesson and we’ll come back in a different way.”

To Merge or Not to Merge: That Is the Question. The Cuyahoga County, Ohio sheriff’s office is looking into the collection of signatures for a merger petition which was circulated in East Cleveland this summer, according to spokespersons for the sheriff and prosecutor. East Cleveland Mayor Gary Norton and his allies had collected more than 1,600 signatures on petitions to mandate the City Council to begin merger negotiations with neighboring Cleveland—of which the Cuyahoga County Board of Elections determined slightly over half were valid—albeit enough to begin negotiating an annexation agreement (Cleveland willing) that would be decided by voters in November; however, the Council did not appoint any negotiators; instead, Council Members asked the county prosecutor to investigate what they believed to be irregularities in the petitions. Or, as Council President Barbara Thomas reported to Ohio state officials: “East Cleveland City Council has serious questions about annex petitions, related certification, and has declared the petitions to be invalid.” Now the sheriff’s office has received the case from the prosecutor and is investigating, according to the County communications director—albeit she has declined to elaborate on what specifically the probe is examining. Adding to the state of confusion, Mayor Norton’s chief of staff, Michael Smedley, recently filed a lawsuit asking the court to compel East Cleveland’s City Council to move forward with merger talks—merger talks in which the City of Cleveland has expressed no interest. The suit also asks the judge to consider appointing annexation negotiators himself. Even as East Cleveland still awaits a response from the State of Ohio with regard to whether it may file for chapter 9 municipal bankruptcy, the municipality has heard from the State Auditor’s office—the office which last month laid out stark financial options for the struggling municipality, noting the road out of fiscal emergency may require the city to cut between 20 to 40 percent of its staff.