Breaking Up Is Hard to Do.

eBlog, 03/06/17

Good Morning! In this a.m.’s eBlog, we consider the trials and tribulations of really emerging from the largest chapter 9 municipal bankruptcy in American history; then we turn to an alternative to municipal bankruptcy: dissolution.

The Hard Road of Exiting Municipal Bankruptcy: A Time of Fragility. Christopher Ilitch, the Chief Executive Officer of Ilitch Holdings Inc., companies in Detroit which represent leading brands in the food, sports, and entertainment industries (including Little Caesars, the Detroit Red Wings, the Detroit Tigers, Olympia Entertainment, Uptown Entertainment, Blue Line Foodservice Distribution, Champion Foods, Little Caesars Pizza Kit Fundraising Program, and Olympia Development), notes that “We are at a critical time in Detroit’s history,” speaking at the Detroit Regional Chamber’s Detroit Policy Conference: “There’s been no community that’s been through what Detroit has been through. Through the depths, there’s been a lot of choices.” Indeed, as the very fine editor of the Detroit News, Daniel Howeswrote: “There still is, and how they’re made could meaningfully impact Detroit’s arc of reinvention: despite a booming development scene spearheaded now by the Ilitch family’s $1.2 billion District Detroit, Quicken Loans Inc. Chairman Dan Gilbert’s empire-building, more effective policing and a burgeoning downtown scene, four words loom: “We’re not there yet.” Mr. Howes notes that the cost of new construction projects still cannot be fully recouped through commercial and residential rents, adding: “The business climate, including taxes and regulation, still is not as attractive as it could be. And longstanding residents in the city’s neighborhoods worry that the reinvention of downtown and Midtown risks leaving them behind.” Or, as Detroit City Council President Brenda Jones puts it: “We have been talking about downtown and Midtown so much, and we know downtown and Midtown are important…If we are going to subsidize development, we would like to see something in it for us as well.” That is, exiting chapter 9 bankruptcy is not a panacea: one’s city still confronts a steep hill to execute its plan of debt adjustment—and a hill the scaling of which comes at higher borrowing costs than other cities of the same size. That is to say, long-term recovery has to involve the entire community—not just the municipal government. Or, as Mr. Howes notes: “Business leaders stepped in to acquire new police cruisers and EMT trucks, even as some of them finance ‘secondary patrols’ of downtown districts. The moves by General Motors Co. and Gilbert’s Rock Ventures LLC, to name two, to employ off-duty Detroit police officers are supported by Detroit Police Chief James Craig…The partnership has been bipartisan and regional. It’s been public and private, city and suburb. It’s required Republicans to act less Republican and Democrats to act less Democratic. That’s not because either side is suddenly non-partisan, but because the long history of confrontation and suspicion chronically under-delivers.” But he adds the critical point: “[A]s the city moves into an election year, as the memories of recessionary hardship dim, as the construction and investment boom continues. None of it is guaranteed, including collaboration forged by leaders under difficult circumstances…If there’s any town in America that can make its virtuous circle become a vicious cycle, Detroit is it. Remembering what’s worked, what hasn’t, and how inclusion can improve the chances for success remains critical…It’s a tricky balance that depends most on leadership and transparency so long as the macro-economic environment remains positive. If there are two themes connecting the reinvention of Detroit with its present, they are that a) experts expect the building and redevelopment boom to continue and b) neighborhood concerns are real and should not be dismissed.” In Detroit, it turned out going into chapter 9 municipal bankruptcy—a slide enabled by criminal behavior of its Mayor, and the profound failure to make it a city on a hill—a city which would draw families and businesses—was easy. That means getting out—and staying out—is the opposite in this fragile time of recovery, or, as Moddie Turay, executive vice president of real estate and financial services at the Detroit Economic Growth Corp., notes: “There’s a ton that’s happening here. We’re just not there yet…We have another five or so years to go. We are at a fragile time — a great time in the city, but still a fragile time.”

Disappearville? Breaking Up Is Hard to Do. Mayor Margaret J. Nelms and her Council Members in Centerville, North Carolina have voted to dissolve the town’s charter and become unincorporated in the wake of voters’ rejection, in January, of an effort to raise property taxes. The municipality (town), founded in 1882, in the rural northeastern corner of Franklin County had a population of 89 as of the 2010 census, a ten percent decline from the previous census: this is a municipality without a post office or a zip code—or, now, a future. It was incorporated during the same time period as the dissolution of the nearby town of Wood in 1961, roughly 80 years after first settlement. Unlike elected officials of other Franklin County municipalities (as well as the county itself) which have four-year terms, in Centerville, the Mayor and its three-member Town Council are elected every two years. The city’s downtown consists of two small old-fashioned country stores—Arnold’s and The Country Store, with one also the local gas station. The City has its own volunteer fire department: there is no police department, so Centerville—like the surrounding unincorporated area—is patrolled by the Franklin County sheriff.

Sen. Chad Barefoot (R), whose district includes Centerville, the sponsor of the state legislation [Senate Bill DRS45094-LM-35 (02/16)] to dissolve the municipality, noted: “There are a lot of towns like Centerville in North Carolina…What they’re doing is pretty courageous. They’re acting like adults. It’s something very hard to do, but it’s very responsible.” His proposed bill, the Repeal Centerville Charter, will allow the dissolution of the town, except that the governing board of the Town of Centerville would be continued in office for days thereafter for the sole purpose of liquidating the assets and liabilities of the Town and filing any financial reports which may be required by law, with any remaining net assets to be paid over to the Centerville Fire Department, which would be directed to use those funds for some public purpose. (In Centerville, the main municipal services provided to residents are: streetlights in the town center; Centerville also pays for an annual audit and holds municipal elections, although only a dozen citizens voted in the most recent municipal election, in 2015.) Centerville will continue to exist as a community, but any local-government services will be provided by the county: any remaining municipal funds left over after the town is unincorporated will be donated to the local volunteer fire department, according to the legislation. Dissolution is a painful choice: Frank Albano, the owner of an antique store in Centerville, rued the city did not consider other fiscal options, such as charging businesses like his an $100 annual operating fee, or asked $5 per float in the New Year’s Day parade. He notes: “The more local the government is, the better.”

The decision to dissolve is, however, not new: it was nearly a century ago that Farrington Carpenter, a Harvard-educated rancher in Colorado, noted that—at the time—there were 20 counties in the Mile High state with populations under 5,000. Municipalities—and their voters—rarely agree to give up their identities, leading him to query: “How can such small counties afford the cost of a complete county government?”  On the other end of the country, in Pennsylvania, home to more municipalities than any state in the union, running the gamut from metropolitan cities to first, second, and third class townships, it has long been a vexing governance conundrum how such a governing model is sustainable. Indeed, James Brooks, my former colleague from when I workd at the National League of Cities, where he serves as Director of City Solutions, reports that according to NLC’s 2015 report examining the economic vitality of cities, the smallest cities have generally been slower to recover—or, as one commentator describes it: “They can’t solve their problems themselves…Wealth has left these little cities to such a degree that they’re basically bankrupt.”