Threatened Municipal Insolvencies

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eBlog, 10/14/16

Good Morning! In this a.m.’s eBlog, we consider the threatened insolvency of the small municipality of Wayne, Michigan; then we puff our way West to consider the puffy revenue options confronting San Bernardino voters next month with regard to legalizing marijuana—as the city nears exit from the longest municipal bankruptcy in U.S. history; then we offer an editorial from the Stockton News with regard to next month’s election in post-municipally bankrupt Stockton, before zooming to the small, virtually insolvent municipality of Petersburg, Virginia as it considers spending its way out of insolvency, before—finally—heading northeast to Atlantic City, where Mayor Don Guardian is seeking to stave off municipal bankruptcy through the sale of some nearly 500 abandoned buildings. Wow.

Where Is Batman? Moody’s has lowered the credit rating of Wayne, Michigan, a city of just under 18,000 just west of Detroit in Wayne County, where the median age in the city is under 40, into junk territory: the small city is on the brink of insolvency with the State of Michigan opting not to help.  Moody’s, in its downgrade, noted: “The downgrade of the city’s issuer rating reflects a very stressed financial position given an ongoing structural imbalance with few options to make timely expenditure cuts or revenue enhancements.” The fiscal challenge comes in the wake of the voters’ rejection last August to approve joining the South Macomb Oakland Regional Services Authority, a scheme hatched by Hazel Park and Eastpointe to allow the two communities to circumvent state constitutional limits on property taxes: indeed, had the measure passed, it would have enabled Wayne to more than double its local property taxes. While Michigan state law strictly caps the amount of taxes a single community may levy, it allows two or more communities to create authorities for providing police and fire services, and levy a separate tax. For instance, neighboring Eastpointe and Hazel Park add an extra 14 mills. The rejected tax levy would have imposed an estimated $354 per household on the winter tax bill alone—but might too have raised sufficient revenue to stave off a chapter 9 municipal bankruptcy filing if it had passed. The municipality has been hard hit by falling property values and rising legacy costs; it has been doing cost-cutting, but will have to deal with how much of its budget goes to support benefits for current workers, and especially, retirees. Some have suggested the municipality should consider consolidation with a neighboring community, especially as the city has limited flexibility to raise revenues elsewhere. In early August, it requested a state financial review, but last week the state said the city retains options to address its structural gap such as making further reductions to retiree healthcare coverage and so direct state oversight is not warranted. For its part, Moody’s wrote that, based on the state review, it concluded that the city has sufficient liquidity to cover operations this year, but will fall short next year without operating adjustments. At the beginning of the week, the city council met to discuss selling the city’s recreation center and retiring approximately $2.8 million of bonds sold through the local building authority which are tied to the center. City leaders are also mulling over a fourth attempt at getting voters to pass a levy increase to fix its structural imbalance as well as additional reductions to retiree healthcare benefits: Wayne began charging retirees 30% of their healthcare premiums last month; however, savings from the change have fallen short of the requisite amount needed to offset the current operating gap. The small city’s request for the state financial review followed voters’ rejection in August of the city’s proposal to join a suburban authority and levy a tax to fund fire and rescue services; voters similarly rejected the proposal to join the South Macomb Oakland Regional Services Authority, which was created by the nearby cities of Eastpointe and Hazel Park last year—as well as a millage proposal that would have raised approximately $5 million to help the city’s strained liquidity. The additional revenue would have enabled the city to stabilize its general fund balance to $2.9 million, according to Moody’s. On the cost side, where expenditures have exceeded revenue by roughly $2 million over the past few years, Wayne balanced its books for the current fiscal year by draining other funds, including its internal service fund and a retiree healthcare trust. City budget officials report closing FY2016 with near depletion of the city’s OPEB trust and a $400,000 draw on general operating reserves. The city expects to draw another $1.6 million of general fund balance in fiscal 2017 and estimates likely depletion of fund balance by December 2017.

Puffing Up Revenues? As San Bernardino nears its exit from the longest municipal bankruptcy in U.S. history early next year, the city’s voters are huffing and puffing over a proposed revenue proposal at the ballot next month: Measure N allowing marijuana in the city is projected to raise more than $18 million in net revenue to the city, several times more than either of the competing marijuana measures, according to a study released by the campaign for Measure N: that study, prepared by Whitney Economics on behalf of the committee for Measure O, concluded Measure O would bring between $19.5 and $24.8 million in revenue. In contrast, New ERA calculates Measure N would bring in $18.2 million, Measure O would bring in $2.4 million, and Measure P would bring in $4.8 million, after the costs related to each measure are accounted for. The huffing and puffing and fiscal visions related to possible estimated revenues which might be generated from sales tax, permit fees, and other assessments stipulated in each initiative, as well as job creation potential from retail, manufacturing, and cultivation allowed by each initiative. Indeed, the confusing array of psychedelic revenue options for voters in a city where marijuana is technically prohibited—but where there are currently 22 dispensaries, is certain to toke voters as they enter the polls to opt between three different measures on November’s ballot—each of which would replace the current ban with a different approach to regulation: if more than one of them gets higher (a pun) than 50 percent of the vote, whichever measure has more “yes” votes will become law in the city. The three options for voters:

  • Measure N, submitted by San Bernardino citizen Katharine Redmon, would establish a 5 percent tax on gross receipts and allow at least 20 medical marijuana dispensaries, if at least 20 apply.
  • Measure O, submitted by citizen Vincent Guzman, would establish an application fee of $250 and annual fees of $5 per square foot of canopy for cultivation, $5 per square foot occupied by the business for manufacturing/test, $100 per vehicle used in transportation, $5 per square foot of dispensary and $1 per square foot of canopy for nurseries.
  • Measure P, prepared by the city attorney’s office, was intended by the City Council as a way to maintain more control over marijuana businesses if residents are inclined to allow them. Because of that, state law would allow fees equal to the cost of enforcement.

Gross receipts for dispensaries are based on the maximum dispensaries allowed under the restrictions of each measure—20 under Measure N, 5 under Measure O, and 10 under Measure P, with the demand at each dispensary estimated based on Palm Springs. That would then be combined with the gross receipts tax, with some $2.3 million expected for Measure N, zero for Measures O and P, and sales tax revenue of $930,027, $744,022 and $837,025, respectively. There are similar calculations for cultivation, manufacturing, and distribution. For instance, proposed Measure P allows the most cultivation, with expected output totaling more than 500,000 pounds of product and employing 840 people, according to one study: Measure N compares at 155,000 pounds and 380 employees, while Measure O would be close to 116,000 pounds and 285 employees in cultivation, according to the study. In contrast, Beau Whitney of Whitney Economics in Portland provided the City with a four-page study which criticizes Measure N for exempting cooperatives and nonprofits, which is how existing illegal dispensaries in the city are organized; ergo, he notes, Measure P offers limited revenue potential: “Other proposals put forth by comparison, either have limited amounts of revenue generation or provide protectionist policies and carve outs for special groups.” Both authors also anticipate significant positive indirect economic impact, dismissing critics’ concerns that dispensaries would hurt property values and other aspects of the economy. Marijuana opponent Darren Espiritu, of the San Bernardino Chair of Citizens Against Legalizing Marijuana, said revenue forecasts in Colorado fell short of industry promises—advising that Colorado state officials now expect about $150 million per year in marijuana tax revenue, out of the state’s $10 billion general fund. He adds: “No amount of revenue can replace a child’s life…Marijuana is ending up in the hands of children at an increasingly younger age. Marijuana use has dramatic negative impacts on the growing brain up to the age of 25.”

Hard Choices for a City’s Fiscal Future. Michael Fitzgerald, a columnist for the Stockton Record, yesterday wrote:  “Stockton voters have one major piece of unfinished business left over from the (chapter 9 municipal bankruptcy), one last gotta-do so the city can move forward: ousting Mayor Anthony Silva…Silva is a loose end of the bankruptcy in the sense that he came in through the side door of that extreme and unprecedented event. Were it not for the electorate’s outraged determination to punish incumbents, he never would have been elected. Which is not to say disadvantaged voters who felt ignored by City Hall were not justified in voting for someone who listened. But it has long been clear Silva is an epic mistake…The only two substantial policies Silva championed, the fiscally suicidal Safe Streets crime-fighting plan and a reduction in building fees, were handed to him by developers…Politically, he botched his first six months so badly, denouncing fellow council members, exhorting his supporters to harangue them, he ensured he’d never command a council majority. He marginalized himself:

But then it appears Silva did not understand the office for which he ran. He has been publicly shocked and perturbed by the statutory limitations placed on the mayor’s power.

Ethical lapses followed. Silva promised if elected not to work two jobs. But he did. He promised not to take a mayor’s salary until crime tumbled. But he did. There were more.

What did not follow was policy. It became clear that “The People’s Mayor” had no real ideas for governing and no real interest in the hard work that goes into civic improvements.

When I asked him what his position on growth was — on sprawl vs. infill — he looked at me as if I had spoken to him in Mandarin.

His treatment of the homeless issue is typical. First he did publicity stunts, sleeping in a box overnight as TV cameras rolled. Next, he used a homeless man as a prop at his State of the City address, then left the poor man to become homeless again.

Finally he proposed the city purchase a hotel. His proposal included no realistic idea of cost, funding or affordability. He ignored entirely how the hotel should link to county/private services to transition homeless people into permanent housing

To top it off, he proposed “any person who refuses our services and simply just wishes to live where they want … will (be) escorted to the city line.” Which is illegal. The proposal was DOA.

Then there was Silva’s farfetched “Stockton Proud” agenda. This plan calls for terraforming beaches onto the waterfront, building a space needle “100% funded by private money,” attracting cruise ships, and other ideas so unrealistic it could have been dreamed up by Michael Jackson for Neverland Ranch.

Administratively, Silva is no better. He leaked the name of a city manager hire, sabotaging the process, leading to the hire of next-in-line Kurt Wilson; yet he complains about Wilson, oblivious that his bungling put Wilson in the job.

But it is as a distraction from the serious business of governance where Silva has been a Hall-of-Famer. I doubt anyone will ever surpass him.

It’s not only the things he intended to do, such as his Chicken Little act over adding chloramines to the water (after he voted to do it!); he brought in Erin Brockovich and her alarmist sidekick who frightened the public with wildly irresponsible warnings of brain-eating amoeba.

It’s also his inadvertent, soap-opera string of goofs, scandals, brushes with the law and strange, almost creepy-clown behavior.

I am not going to rehash those. It is tragic, though, that while Sacramento made bold progress under (badly flawed) Mayor Kevin Johnson, and Fresno gained national recognition for its progress under Mayor Ashley Swearingen, Stockton stuck itself with Silva.

Worse, Silva is refusing to cooperate with investigators trying to understand how his stolen gun came to be used to kill a 13-year-old. And he has been indicted on felony and misdemeanor charges related to his alleged participation in an alcohol-fueled strip poker game with teens.

He deserves his day in court.

Hating City Hall is part of Stockton’s civic culture. But if it must be done, it must be done wisely. Hate incompetence. Hate failure to adequately serve the city’s disadvantaged. Above all, hate the charlatans, because they hold the city back.

Spending When a City Has No Money to Spend. The Petersburg City Council has voted 5-1 to spend more than a quarter-million dollars, as the municipality teeters on insolvency, to enter into emergency negotiations with the Robert C. Bobb Group, claiming the purpose was intended “to preserve the interests of the City to maintain the proper functioning of the government,” with the vote coming in the wake of two closed-door sessions. Mr. Bobb is a former Richmond city manager who also served briefly as an emergency financial manager for the Detroit Public Schools—where, under his watch, DPS’s deficit tripled—in no small part because of a series of arrangements with armies of “consultants,” as he sought, under Michigan’s emergency manager law,  to address DPS’s $327 million budget shortfall by closing nearly half of Detroit’s schools and increasing class sizes in the remaining ones to as high as sixty—even as he submitted an AMEX bill with more than $1 million in travel charges, but proposed closing half the district’s schools and increasing class sizes up to 60 children in a classroom and cutting all general bus service—and proposed putting DPS into chapter 9 municipal bankruptcy. Nevertheless, Petersburg Mayor W. Howard Myers noted: “We felt that this is an emergency situation, because of the situation the city is in,” even as he declined to state how much the contract would cost the insolvent municipality—already confronted with the effects of a $12 million shortfall in the current fiscal year’s budget even as it is desperately trying to pay down nearly $19 million in debts identified at the close of the previous fiscal year. For his part, Mr. Bobb said: “Our goal is not to be the permanent solution, but to help stabilize them and help recruit permanent leadership.” It remains unclear what the decision might mean with regard to the municipality’s request for state assistance. Virginia Sen. Rosalyn R. Dance (D-Petersburg) voiced concern about the cost and timing of the proposal, noting: “We just committed to spend some money, and I don’t know how much money we’ve committed to spend…If we have extra money to spend, it should be going to the schools.” There was no public comment period; the Council first took 90 minutes to discuss personnel measures related to the performance of the interim city manager. Afterward, the members broke for discussion of procurement and pending litigation.

Mayor Myers said the city faces several possible lawsuits but declined to elaborate. He said money to fund the Bobb Group’s work will come from savings the city has incurred from not filling open positions. For his part, Mr. Bobb declined to comment on his firm’s fees, citing ongoing negotiations; however, he noted he planned to take an active role in assisting the city, although the day-to-day work will be conducted mostly by other staff members of the Washington, D.C.-based business. Indeed, at the request of Petersburg Commonwealth’s Attorney Cassandra S. Conover, Petersburg Circuit Court Judge Joseph M. Teefey has signed an order directing Chesterfield County Commonwealth’s Attorney William W. Davenport to expand his ongoing probe of the Petersburg Bureau of Police—and, widening the scope, to include “any and all” issues involving the City of Petersburg’s finances: the investigation now will include “allegations regarding financial improprieties of the City of Petersburg which warrant investigating and/or any prosecutions resulting from any charges placed pursuant to said investigation.” Counselor Davenport was appointed last December after the Commonwealth Attorney requested a special prosecutor to look into a case of money alleged to have disappeared from the police evidence room. (The Virginia State Police and the FBI have been assisting with that probe.) Ms. Conover reports she met with representatives of several state and federal agencies last week, including the Virginia State Police, to discuss the status of that investigation as well as questions related to Petersburg’s finances, noting that, as a result of that meeting, she had submitted an order calling for an expansion of the investigation “to include all financial matters/improprieties of the City of Petersburg.” Meanwhile, a team of auditors and other financial experts led by state Secretary of Finance Ric Brown subsequently reported that Petersburg’s system of accounting for revenue and spending had numerous shortcomings, including more than 30 “exit points” for city funds – individuals or departments who or which were allowed to write checks without specific authorization: as a result of the system’s flaws, the state team said, city officials literally did not know exactly how much annual revenue the city had received or how much it had spent until after the end of the fiscal year, when an outside consultant “reconciled” the various departments’ income and spending ledgers.

Tempus Fugit. Atlantic City Mayor Don Guardian yesterday the city would use tax liens, emergency condemnation, or eminent domain proceedings to take control of nearly 500 abandoned buildings and sell them to developers who would either repair or raze them, demarking the city’s latest effort to raise revenues to avert a state takeover. According to Mayor Guardian, in addition to being a fiscal boost, the move could address a longstanding gripe among visitors about the seaside gambling resort: “It has frustrated the community for decades that it seemed almost impossible to do anything about these abandoned properties.” The proposal appears to stem from the Mayor’s efforts this year to successfully enlist six neighborhood associations to walk their communities and come up with a list of properties which appeared to be abandoned—an outreach that has resulted in identifying some 598 properties—albeit, since then, the owners of more than 100 of them have begun repair work on their structures after the city threatened to take possession of them, according to Mayor Guardian. (Atlantic City differentiates between buildings in good shape which are simply currently vacant versus properties in unsafe or uninhabitable condition, many of which have not generated taxes in months or years.) Mayor Guardian said he does not have a target figure in mind in terms of how much revenue the city might bring in by selling abandoned properties, yet notes that every little bit helps as it tries to cobble together a financial plan to stave off a threatened state takeover of its assets and major decision-making powers by next month.

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Should States Bear a Greater Fiscal Responsibility to Address Disparities–especially when so many Lives and Futures are at Stake?

 

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eBlog, 9/12/16

In this morning’s eBlog, we consider the massive and cumulative service insolvency in public safety in the bankrupt City of San Bernardino. Even as the City nears its longest road out of bankruptcy of any city ever in U.S. history, the extraordinary absence of any state role to help the city confront its cancer of crime could bode ill for the city’s post-chapter 9 recovery. Then we turn to Michigan and the ongoing issue with regard to what a state’s role ought to be in addressing fiscal disparities. While the State of California appears to be disinterested in any such role; Michigan traditionally has; but, increasingly in recent years, it has eroded such support, with grim fiscal consequences in Flint, Detroit, etc.

Can the City Do it All by Itself? San Bernardino, still healing from last December’s terror attack—the city’s response to which has been praised by the FBI, nevertheless appears today caught between a rock and a hard place: it is experiencing a surge in violence this year unlike any it has faced in decades: with four months left in 2016, there have been 150 shootings and 47 slayings in the city of 216,000 residents, compared to 44 homicides all of last year, including the 14 people killed by terrorists at the Inland Regional Center. San Bernardino is now on track to have more murders than in any year since 1995, when 67 people were killed. There is no explanation why; by the same token, even as the city nears its exit from the longest municipal bankruptcy in American history, the terrible rise in violent crime hardly augurs well for its assessed property values—or for its hopes for attracting economic development. The violence might be adding to other tensions: the killings have disproportionately victimized San Bernardino’s black residents, who account for 14 percent of the population, but nearly half of those killed.  San Bernardino Police Chief Jarrod Burguan says the city has been especially hard hit by state initiatives that reduced some drug and property-related felonies to misdemeanors, leading to shorter sentences for criminals; he did not need to mention the reductions in the city’s public safety budget as it struggled to cobble together its proposed plan of debt adjustment now awaiting final approval for U.S. Bankruptcy Judge Meredith Jury. In 2008, there were more than 340 police officers on the force. Today, there are about 215. The Chief does note, however, “We don’t have the capacity to investigate everything that’s reported in the city.” Others point to the lack of economic opportunities, its years of cuts to diversion programs, and a lack of other basic services — such as working street lights in many neighborhoods—an issue, as readers remember, that both Detroit Emergency Manager Kevyn Orr and Mayor Mike Duggan made immediate and critical priorities—have contributed to this year’s violence. Those reduced fiscal resources have, no doubt, contributed to solve fewer than 40 percent of this year’s homicides.

Unsurprisingly, a new study, commissioned by Southern California law firm Graham Donath, using FBI data and looked at crime rates, police presence, and investment in police departments, as well as community factors, including poverty, education, unemployment, and climate, determined San Bernardino to be the state’s most dangerous city—just ahead of Stockton and Modesto: the study found a high correlation between crime rates and poverty: San Bernardino’s poverty rate exceeds 30 percent, or, as the report notes: “In taking a look at our collected data, no city in the bottom ten of crime rate (that is, has the lowest crime) has a poverty rate higher than 12.9 percent,…But for cities in the top ten, every one has a poverty rate of 14.5 percent or higher, topping out at 30.6 percent in San Bernardino.”

A Lonely Vigil. Understandably, in the wake of the State of California’s rejection of the city’s application for a state grant to help fund Operation Ceasefire, Chief Burguan must wonder whether the city is alone in its battle against killings—or, as he asks: “Who really is that concerned about San Bernardino? Or are people at the state level happy letting San Bernardino drown in this stuff?…We clearly have the most significant crime spike of any place in the state, and all that money went elsewhere.”

Getting to the Heart of Fiscal Disparities—or, What We Have Here Is a Failure to Communicate. Taxpayers for Michigan Constitutional Government, Eastpointe City Manager Steve Duchane Duchane (Eastpointe is a city of about 32,000 in Macomb County), and two other Eastpointe employees have filed suit against the State of Michigan, the Michigan Department of Technology Management and Budget, and the Michigan Office of the Auditor General in the Michigan Court of Appeals. Mr. Duchane says local governments in Michigan have been doing a lot of reacting to revenue sharing cuts through the years, slashing services, and programs impacting municipalities, because they have been receiving fewer state funds. Thus, he is at the forefront of more than a dozen Michigan local governments taking action, joining a nonprofit group which has filed the civil lawsuit for overstating various payments to local governments and causing a more than $1-billion shortfall to municipalities. Ow, the state has until the end of this month to file a response. Kurt Weiss, a spokesman for the Michigan budget office, has released a statement: “The Office of Financial Management within the State Budget Office works hard each year to properly identify expenditures to determine the amount of state spending that goes to the aid of local governments…Those expenditures are in turn submitted to the Office of Auditor General for validation to ensure the calculations are accurate. This is a methodology that has been applied consistently since the passage of Proposal A (Proposal A was a property tax measure adopted in 1994: prior to its adoption, local property taxes were based on a property’s assessed value or an amount equal to 50% of the property’s market value, meaning that property taxes went up and down in close relation to an increase or decrease in property value. With the passage of Proposal A, however, the tax was stabilized.). The State Budget Office will take time to further review the complaint, but it’s important to note that these calculations have been consistently applied over time.” The local governments disagree; they respond the state is violating the Michigan Constitution by overstating spending that is paid to local governments and engaging in an “illegal tax shift.” Their  complaint states that Michigan is including payments from Proposal A revenue and payments to charter schools, county road commissions, and others from the trunk line roads fund and payments to cover the costs of state mandates in its calculations of spending in the form of aid that is paid to local governments: “When these items are subtracted, state spending in the form of aid that is paid to local governments falls significantly below 48.97% of total state spending;” ergo, in violation of the Michigan Constitution, according to the complaint.

This the complainants are seeking these items be removed from the funding formula for aid paid to local governments, and asking the court to order the state to make up the funding shortages, claiming that the loss of billions of dollars in funding has forced local governments to make significant cuts to services and programs to stay solvent. Or, as Mr. Duchane puts it: “State spending continues without control, and the locals have paid the price.” The challengers’ organization here was founded by Mr. Duchane and its president, John Mogk, a law professor at Wayne State University; its members include the cities of Center Line, Eastpointe, Mt. Clemens, New Baltimore, Richmond, Roseville, Utica, and Warren and Clinton Township in Macomb County; Hazel Park in Oakland County; Harper Woods, Southgate and Grosse Pointe Woods in Wayne County; Grosse Pointe Shores, which straddles Wayne and Macomb counties, the city of Auburn in Bay County, the Sugar Law Center for Economic and Social Justice in Detroit, and Wayne City Councilman Tom Porter. In addition, other municipalities may be joining the group, whose attorneys include John Philo, executive and legal director of the Sugar Law Center; Tracy Peters, who specializes in education and the rights of students and parents, and Robert Sedlar, a constitutional law and legal conflict professor at Wayne State University School of Law.

For his part, Mr. Duchane said that while the group does not have data to explain where the more than $13 million in funds promised to Eastpointe to address municipal disparities has instead been used, he can, obviously, report where he believes it should have gone: That kind of money, he notes, would have meant that municipal leaders would not have had to raise taxes—especially in the wake of the Great Recession which brought so many Michigan municipalities to their fiscal knees, particularly because of the mortgage market meltdown that so devastatingly impacted real estate values, the state’s elimination of the personal property tax on businesses, and continued cuts in state revenue sharing. Combined with the state’s Proposal A and Headlee Amendments imposing state mandated limits on property tax growth, he noted Eastpointe and Hazel Park formed a unique taxing authority for 20 years to raise funds for police and fire services in their cities. The small City of Wayne attempted tried to join that authority; however, voters in that city and Eastpointe rejected the effort last month. Now, the City of Wayne, facing insolvency in as early as next year, has asked the state for an emergency financial review and could be facing a state-appointed emergency manager. Indeed, the city’s Mayor, Susan Rowe, last month reported that city officials are set to meet with the Michigan Treasurer later this month to discuss finances that communities are confronting, noting: “We’re just the tip of the iceberg…We’re not the only city in this (financial) situation. It’ll be happening to communities around us soon. We don’t have an expense problem. We have a revenue problem.”

What Is the State Role in Municipal Fiscal Distress?

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eBlog, 8/16/16

 In this morning’s eBlog, we consider, again, the un-considerable: could a city fall back into municipal bankruptcy? Is Detroit’s recovery sustainable? Is it municipal-wide—or have we only really been able to witness the remarkable renaissance of its sparkling downtown? And, as we often have, we also consider the important state-local fiscal relationships and roles—especially in Michigan where the combination of seemingly relentless state reductions in revenue sharing to address such stark fiscal disparities has been a critical factor in the state’s takeover or so-called Emergency Manager program—a program which was seemingly the critical step to getting Detroit into and out of chapter 9 municipal bankruptcy, but which—in imposing a state actor with no accountability to the citizens and taxpayers of a city or public school system, not only displaces democracy, but—in the case of Flint, led to signal human and health risks and costs, and, in the case of the Detroit Public School System forced a massive state bailout.

Now, as the small Detroit municipal neighbor of Wayne nears insolvency, still another Michigan state takeover looms. It is difficult to balance how much the state has contributed to this looming insolvency and how the elimination of democracy and accountability to the citizens of a city whose fiscal misery is, in some significant part, caused by the state, not by the city, should be assessed.

Post Municipal Bankruptcy Blues II.  Perry Applebaum, writing about “Detroit’s Recovery, Downtown Roars and Neighborhoods Sputter,” in the New York Times, described post chapter 9 Detroit as “an urban dystopia of poverty, crime and blight,” adding that “Detroit used to be a pretty clear story. It was a symbol of American economic might and then it was a symbol of American urban ruin. But in a place not given to deep philosophizing — where the literary canon is defined by the razor-edged crime novels of Elmore Leonard — almost no one here seems entirely sure what to make of this moment’s Detroit.” He concurs that the “swift exit in 2014 from the city’s traumatic bankruptcy has been followed, almost everyone agrees, by significant progress on improving city services long deemed hopeless…But what that means for the rest of the city and who is benefiting have set in motion a layered conversation about development, equity, race and class. It is playing out with particular force here in what was once the nation’s fourth-largest city and is now a place at once grappling with poverty, crime and failing schools, but also still animated by the bones of its former glory.” Mr. Applebaum also notes that: “Downtown is 90 percent better than it was 10 years ago, but you go a few blocks in any direction, and it’s terrible,” according to Lulzim Shaqiri, whose wife’s family has owned a restaurant since 1983. Ms. Shaqiri told him: “You can talk about helping the neighborhoods, but there’s really no neighborhood at all here. It’s just as dead as dead can be.”

In contrast, he notes the enthusiasm of Mayor Mike Duggan, who told him: “People in this city understand where we are and where we are going…This city went from 1.8 million people in the 1950s to less than 700,000 now. There’s been a 60-year decline, where we lost more than a million people, and those people who left didn’t take their houses with them. So, the magnitude of what we’re recovering from is enormous, but the recovery has started,” adding that there is “ample evidence that he is right. No one doubts how serious the problems are from the disastrous state of the schools to the threadbare transit system to the challenges of adding enough jobs to fuel a sustainable recovery. But more than 10,000 blighted properties have been demolished, removing dangerous eyesores and usually allowing neighbors to buy the vacant lots for $100. An additional 2,000 homes are being rehabilitated and reoccupied…There are about 5,000 new housing units either planned for construction or being built. Housing prices have ticked up, and the city’s toxic foreclosure problem shows signs of improving…In a city notorious for not even being able to even light its streets, more than 62,000 new LED street lamps have been installed. Officials say the whole city will be relit by the end of the year. And the most recent Census Bureau estimate showed the smallest population decline in decades. Officials predict that next year’s figures will show a population gain.” But he closes his article with a darker perspective, based upon a blog post, “Why I Hate Detroit,” by Eric Thomas, who is black and a partner at a local marketing firm; the post focused on the discouraging situation with the city’s schools, the lack of opportunity for the majority of the city, and what he deemed “the weird way the resurgence in relatively privileged warrens, about 5 percent of the city’s 140 square miles, is seen as a proxy for the city as a whole.”

The Challenge which can pit Democracy against Solvency. Wayne, the small municipality in Wayne County, Michigan near Detroit, now awaits a state takeover in the wake of its voters’ rejection last week of a tax proposal to support police and fire protection. Wayne has struggled for some time to reign in expenses: city expenditures have exceeded revenue by roughly $2 million over the past few years, albeit the city balanced its books for the current fiscal year by draining other funds, including its internal service fund and its OPEB retiree healthcare trust—so that city officials report closing FY2016 with near depletion of the OPEB trust and a $400,000 draw on general operating reserves. The city expects to draw another $1.6 million of general fund balance in FY’2017 and estimates likely depletion of fund balance by December of 2017. Aside from property taxes, Michigan’s municipalities are mainly dependent on Michigan’s state revenue sharing program—a program which itself has consistently declined since 1998. Indeed, over the last 14 years, Michigan has led the nation in cuts to its municipalities of state aid. According to the US Census Bureau, from 2002 to 2012, municipal revenue from state sources increased in 45 states and the average increase was 48.1%; in Michigan, municipal revenue from state sources declined 56.9% from 2002 to 2012, according to a Michigan Municipal League report.

Now it appears the state is likely to reap what it has sowed: it appears more and more certain the state will take over the city—an action which the city’s elected leaders fear—especially in the wake of the human and fiscal devastation that came from the state’s takeover in Flint—a state action which has left a residue of state governmental fear and distrust. Indeed, despite the steep fiscal hole in which the small city finds itself, Wayne’s Mayor, Susan Rowe, after watching the extraordinary damage to human health and safety as well as fiscal distress caused by Flint’s state-appointed Emergency Manager (who later, inexplicably, was named by the Governor as Emergency Manager for the Detroit Public Schools) vowed she would never put her residents at the mercy of the state. However, in the wake of last February’s Moody’s downgrade, Mayor Rowe not unreasonably fears her city will become the first municipality since Flint to be placed in state emergency financial management. She notes: “I think it will happen, and I think it would be devastating…People tell us to live within our means, but we can’t shut the doors. We can’t say we’re not going to have police or fire or trash collection…We just have no way of bringing in any more money.”

Michigan’s emergency manager program, under which the Governor appoints a manager with extensive powers over a troubled municipality or school district that meets certain criteria, was initiated in 1990: to date, 11 Michigan municipalities and three school districts have had such emergency managers appointed. Unsurprisingly, it is a program that has drawn sharp criticism not only for its usurpation of local authority, but, in the wake of Flint and the Detroit Public Schools, it has, increasingly, been perceived as a damaging failure with signal unaccountability.

Nevertheless, for Mayor Rowe, a retiree whose munificent mayoral salary is $3,000 annually, the squeeze is almost unimaginable: assessed housing values cratered during the recession and revenue has plunged more than 40 percent since 2010. The city lost a property-tax appeal with Ford Motor Co., its largest employer. State limitations prevent local property taxes from increasing at a rate higher than annual inflation. If anything, the tipping point came last week when the city’s voters resoundingly rejected a tax increase that would have enabled the city to share public-safety expenses with two other municipalities. Mayor Rowe said people are frustrated, and she does not hold the vote against them. Now, because the small city lost its investment grade rating, its costs of borrowing seemingly are adding insult to fiscal injury: Moody’s has downgraded Wayne two notches to Ba1 from Baa2 and its general obligation limited tax (GOLT) rating fell to Ba2 from Baa3, with the credit rating agency noting: “The downgrade of the city’s issuer rating to Ba1 reflects a very stressed financial position given an ongoing structural imbalance with few remaining options for increasing revenues or cutting expenditures.” Further, Moody’s placed the ratings under review for a further downgrade pending developments related to the city’s request for a financial review by the state—a request made in the wake of the Aug. 2nd rejection of the city’s proposal to join a suburban authority and levy a tax to fund fire and rescue services. On the first item, the municipality’s voters rejected the proposal to join the South Macomb Oakland Regional Services Authority, which was created by the cities of Eastpointe and Hazel Park in 2015. On the second, voters rejected a millage proposal which would have raised approximately $5 million to help the city’s strained liquidity: the anticipated revenues had the citizens adopted the measure would have enabled Wayne to stabilize its general fund balance according to Moody’s; however, as Mayor Rowe noted: “Our residents do not want to give us the revenue we requested. Now, this is the avenue we have to take.”

9-1-1. If the state declares a fiscal emergency, the city will have four options:

  • a consent agreement with the state,
  • appointment of an emergency manager by the state,
  • request for approval to file Chapter 9 municipal bankruptcy, or
  • mediated negotiation among creditors.

Mayor Rowe has indicated that that city will likely opt for appointment of an emergency manager.

The review for a further downgrade is tied to the decision to seek a state review. “A declaration of fiscal emergency would give the city greater power to cut expenditures, it also increases the risk that the city may seek to restructure its debt,” according to Moody’s.

Have We Learned Any Lessons from Flint?

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eBlog, 8/11/16

In this morning’s eBlog, we consider the fiscally bleak Detroit public school system—a system critical to the Motor City’s fiscal and human future—but where the state intervention appears to be unravelling; we then consider the related governance challenge with regard to municipalities and school systems at fiscal risk—specifically, in the wake of the state-imposed emergency manager in Flint, Michigan (a manager who was then, for still inexplicable reasons named by Michigan’s Governor to be the emergency manager for Detroit’s public school system)—an imposition that led to severe threats not just to the city’s own authority and fiscal future—but also to grave threats to human lives. We ask: is the state’s emergency manager law a state law which ought to be reconsidered? What lessons have been learned from Flint? Then we return to Puerto Rico with a brief look at this a.m.’s marvelous blog from the New York Federal Reserve—albeit, the report is hardly optimistic about the human capital so critical to Puerto Rico’s long-term economy.

Getting School on Debt. Michigan’s plan to bail out Detroit Public Schools (DPS) is putting debt backed by state aid at risk of falling into default if the bonds are not refinanced by mid-October, with S&P Global Ratings having, in the wake of two downgrades since June, reduced DPS’s debt to below a passing grade. In response, a DPS spokeswoman reports: “Detroit Public Schools and the Michigan Department of Treasury are in the process of refinancing the bonds with a goal to have this completed prior to Oct. 1, 2016.” The state restructuring of DPS’ finances diverts state payments on about $370 million of bonds sold in 2011 and 2012 to the new, debt-free Detroit school district—a district which bears no responsibility for the old debt; however, according to S&P, Michigan still lacks a plan to refinance the bonds. Absent such a plan, S&P warns, it would likely consider the DPS debt a distressed exchange that would merit being labeled as a default. The emerging, failing grade comes in the wake of the state legislature’s partisan decision to adopt a $617 million rescue plan under which, as we have previously noted, the Detroit district was split in two: a new, debt-free Detroit Public Schools Community District is set to open next month with about 46,000 students in 97 schools, while the debt of the former DPS is to be paid off with a combination of state aid and collections from the district’s 18-mill non-homestead levy, which is collected on businesses and second homes.

The new statute means the existing public school district is responsible to continue to pay off the district’s old debt, including about $2.2 billion of municipal bonds and pension liabilities from property taxes—with the state providing approximately $467 million to help repay the old debt: the Michigan Finance Authority, which issued the debt cut by S&P for DPS, is putting together a plan to refinance the debt by October 20th. However, since Michigan Governor Rick Snyder signed the bill, S&P has downgraded the bonds—which Moody’s has moodily graded Caa1 with a negative outlook. S&P notes its assessment is based “on the lack of a formal plan regarding bondholder repayment terms” and the elimination of one of the pledged revenue streams in the fiscal year that begins next October. The restructuring needs to be in place before October 20th when state aid moves to the new district, leaving the bonds rated with S&P with just the property-tax pledge—changes which S&P notes have created uncertainty for bondholders, raising the risk of default, with analyst Jane Ridley noting: “If they don’t get it refinanced, the loss of the revenue stream is going to seriously erode bondholder value,” adding last week that separating the state-aid payments from the bonds creates a more than 50 percent chance the debt could be cut again in the next two months, warning that it could use its D, or default category, if repayment is less than originally promised: “As October approaches and ushers in the new fiscal year, it creates greater uncertainty as to whether bondholders will receive full and timely payment…If the actions taken through this process provide bondholders with anything less than the full promise of the original bonds, it is likely to be considered a distressed exchange and therefore a default under our criteria.” Note, as we have previously written, the partisan vote in the legislature to create two school districts in the city—one a public school district, the other charter schools—had already raised apprehensions about a recipe for failure. The new fiscal warning from S&P hardly heralds academic or fiscal high grades. The harder academic question is whether the bleak fiscal warnings could serve to deter young families with children from wanting to move to Detroit.

Not in Like Flint. Detroit’s fiscally devastated public schools and Flint’s life-threatening drinking water crisis were connected by two critical factors: the state’s Emergency Manager law—here specifically by one such manager who, after desperately failing in Flint, somehow was inexplicably appointed by Gov. Snyder to be the DPS emergency manager—and deep state cuts in revenue sharing. Coming out of the Great Recession, which disproportionately hammered assessed property values—values still deeply distressed in many Michigan municipalities—state tax limitations and reduced revenue sharing have left a legacy of municipal bankruptcy and fiscal instability at the local level. Reductions in aid to Michigan municipalities (cities, villages, and townships) totaled $5.5 billion between 1998 and 2016, according to a May report from Great Lakes Economic Consultants. It means that despite a nationwide recovery, Michigan municipalities are still struggling with depressed assessed housing values, tax limitations, and cuts in state revenue-sharing. It means the state still has the authority to preempt local democracy through the imposition of an Emergency Manager—an imposition which, unlike in Detroit, in the cases of Flint and the Detroit Public Schools have caused fiscal and severe physical harm.

The state actions have also left a residue of governmental distrust: indeed, despite deep cuts in spending, Wayne voters last week rejected a tax proposal to support police and fire protection. (Wayne is a small city of under 18,000 in Wayne County west of Detroit.) Wayne’s Mayor, Susan Rowe, after watching the extraordinary damage to human health and safety as well as fiscal distress caused by Flint’s state-appointed Emergency Manager vowed she would never put her residents at the mercy of the state. However, in the wake of last February’s Moody’s downgrade, Mayor Rowe not unreasonably fears her city will become the first municipality since Flint to be placed in state emergency financial management. She notes: “I think it will happen, and I think it would be devastating…People tell us to live within our means, but we can’t shut the doors. We can’t say we’re not going to have police or fire or trash collection…We just have no way of bringing in any more money.” For Mayor Rowe, a retiree whose munificent mayoral salary is $3,000 annually, the squeeze is almost unimaginable: assessed housing values cratered during the recession and revenue has plunged more than 40 percent since 2010. The city lost a property-tax appeal with Ford Motor Co., its largest employer. State limitations prevent local property taxes from increasing at a rate higher than annual inflation. If anything, the tipping point came last week when the city’s voters resoundingly rejected a tax increase that would have enabled the city to share public-safety expenses with two other municipalities. Mayor Rowe said people are frustrated, and she does not hold the vote against them.

Have There Been Lessons Learned from Flint? The terrible harm to human life and fiscal stability in Flint caused by the former state appointed emergency manager has increased political pressure to repeal the state’s law—one of the most preemptive of municipal authority in the nation, under which the state is authorized to intervene in fiscally struggling municipalities and school districts, and preempt all municipal or county authority, as well as to break union contracts if negotiations fail—or, as Michigan Municipal League COO Tony Minghine describes it: “They go in, they come out, and the cities become a less desirable place to live: The only tool they’re given is to cut.” (When first enacted in 1990, the state’s emergency manager law was designed as an early warning system to ward off defaults and bankruptcies. Under Gov. Rick Snyder, who was first elected in 2010, the pace of state intervention increased as the recession eroded local tax revenue, especially from property taxes. Unsurprisingly, voters repealed the measure in 2012 after forcing a statewide ballot question. Less than two months later, however, the legislature approved a similar law with a provision that preempted state democracy by barring it from being overturned by a referendum.)

Indeed, the experience under the state law, to date, is less than inspiring: most of the dozen Michigan towns and cities which have been under the direction of an emergency manager continue to lose population; their poverty rates remain between 20 percent and nearly 50 percent, according to U.S. Census data. In Flint, garbage collection stopped at the beginning of this month after a contract dispute. Or, as former State Treasurer Robert Kleine puts it: “The law’s pretty much a Band-Aid, because it never really addresses the fundamental issue; it’s mostly a lack of tax base.” My colleague and mentor in the field of municipal bankruptcy Jim Spiotto notes Michigan might be better served changing its law to allow local officials input into decision-making and reducing the “heavy hand” of an emergency manager: “Local government is representative of the people, and you don’t want to lose sight of that.”

What state voters also do not appear losing sight of is the exceptional damage the state oversight has wrought in Flint: Six state employees were criminally charged last month, accused of trying to cover up the poisoning of Flint’s drinking water. Three other government workers were charged earlier. Gov. Snyder publicly apologized last March for the contamination, but claimed the law has been a success. He said he would be open to improving the law, but not repealing it; state Sen. Jim Ananich (D-Flint) has a different perspective: “It’s a failure-driven model…They leave you with a city that’s impossible to run.” Indeed, as Eric Scorsone, who directs the Center for Local Government Finance and Policy at Michigan State University, puts it, there is no clear path forward, short of increasing state revenue-sharing and other assistance.

What to Do about a Declining Economy? Moody’s warns that the surge in Zika cases in Puerto Rico may harm the U.S. territory’s already declining economy—one already projected to decline by 2 percent in FY2017, with the warning coming as the crack New York Federal Reserve squad of Rajashri Chakrabarti, Giacomo De Giorgi, and Rachel Schuh, writing for the Fed’s Blog Liberty Street Economics, this morning noted, with regard to human capital, that: “The test results for both PISA and NAEP are alarming, and even more so given the migration trajectories out of Puerto Rico. The very slow growth of Puerto Rico seemed puzzling given previous estimates of the quantity of human capital—as proxied by the number of years of schooling—and its contribution to growth. However, this slow economic growth is in fact consistent with the evidence on the quality of human capital highlighted in this blog. As a caveat, the test scores cited here reflect the human capital of students who have not yet entered the labor force, so this analysis relies on the assumption that these poor educational outcomes persist. It seems clear, nonetheless, that boosting educational performance can help Puerto Rico substantially in establishing future economic growth.”