An Unelected Board May Be Implementing Austerity in a City Near You

Fiscal control boards are taking control over the finances of cities across the United States.

Joel Cintrón Arbasetti and Carla Minet June 1, 2017

Fiscal control boards follow a globally tested formula that is well-known for not being effective in improving the quality of life of the population: austerity. (ThoroughlyReviewed via Visual Hunt)

This post first appeared at Cen­tro de Peri­odis­mo Inves­tiga­ti­vo.

Regard­less of their size, the num­ber of res­i­dents or the fis­cal prob­lems they have, U.S. cities under fis­cal con­trol boards have faced a for­mu­la that con­sists pri­mar­i­ly of the fir­ing of pub­lic employ­ees, pen­sion cuts, an increase in the cost of col­lege edu­ca­tion, and a reduc­tion in essen­tial ser­vices, such as health. The struc­tures, the laws that cre­ate them and the names of the boards vary; the pub­lic poli­cies they impose, not so much.

Despite the nor­mal­iza­tion of the boards and their com­mon­ly broad pow­ers, the fed­er­al gov­ern­ment and Con­gress lack con­trol mech­a­nisms, stud­ies, data­bas­es or any enti­ty that active­ly mon­i­tors their impact or effi­cien­cy, the Cen­ter for Inves­tiga­tive Jour­nal­ism (CIJ) in Puer­to Rico found.

In the Unit­ed States, there is no cen­tral­ized infor­ma­tion across states (about Fis­cal Con­trol Boards),” said Deb­o­rah Kobes, author of the the­sis Out of Con­trol?: Local Democ­ra­cy Fail­ure and Fis­cal Con­trol Boards, pub­lished in 2009. There also isn’t a real def­i­n­i­tion about what a board is.”

Some cities have a receiv­er, which is a per­son appoint­ed to take con­trol over a local agency or gov­ern­ment. It can car­ry dif­fer­ent titles: coor­di­na­tor, super­vi­sor or emer­gency man­ag­er, as was the case in Detroit.

It might not be a full board. It might be just one per­son that is appoint­ed, that comes with the back­ing sup­port of the state, but the char­ac­ter­is­tics or the pow­ers, align with what is thought of as a con­trol board. Giv­en the range of the way they are imple­ment­ed, there was no sin­gle way to iden­ti­fy all exist­ing exam­ples,” said the doc­tor in urban eco­nom­ic policy.

Boards are cre­at­ed by state laws, such as Detroit, which has had two boards with dif­fer­ent names since 2013. They are also cre­at­ed by con­gres­sion­al laws, such as Puer­to Rico and Wash­ing­ton, D.C. In both sce­nar­ios, they are con­ceived as tem­po­rary enti­ties, with the promise of improv­ing the fis­cal sit­u­a­tion, bal­anc­ing bud­gets, pay­ing debts and recov­er­ing access to the bond mar­ket in local­i­ties with a fis­cal emergency”.

But the social costs of the mea­sures tak­en by the boards to achieve their objec­tives do not appear to enter the equa­tion, are being over­looked by pol­i­cy­mak­ers or are con­sid­ered an accept­able col­lat­er­al dam­age to improve gov­ern­ment finances. Cit­i­zens, on the oth­er hand, often have expec­ta­tions that boards will bring effec­tive­ness to the gov­ern­ment, improve the local econ­o­my or end gov­ern­ment corruption.

Detroit, for instance, entered bank­rupt­cy in 2013, once the Detroit Finan­cial Advi­so­ry Board was appoint­ed. When the Chap­ter 9 process was com­plet­ed in 2014, anoth­er board named the Detroit Finan­cial Review Com­mis­sion was formed. In Decem­ber 2017 the city will present its third bal­anced fis­cal bud­get, an event that marks the end of the func­tions of the 11-mem­ber com­mis­sion that con­trols the city’s finances.

Now some say that Detroit is bloom­ing in ref­er­ence to sev­er­al infra­struc­ture projects and com­merce in the urban cen­ter. How­ev­er, Adela Nieves, a Puer­to Rican com­mu­ni­ty orga­niz­er liv­ing in Detroit for 11 years, ques­tions: Detroit is back, but for whom?”

City admin­is­tra­tors are claim­ing suc­cess­es in fis­cal man­age­ment, but sev­er­al social indi­ca­tors reflect that, between 2007 and 2015, the qual­i­ty of life of some of its res­i­dents deteriorated.

In 2007, before the fis­cal emer­gency” was declared and the Board’s arrived, the medi­an house­hold income in Detroit was $28,097, while in 2015 it was $25,980. As for peo­ple 65 years of age and old­er below the pover­ty line, the trend is on the rise: in 2007 it was 17.5% and in 2015 it reached 19.1%, accord­ing to the Cen­sus Bureau.

This goes against the ten­den­cy to reduce pover­ty in adults over 65 that the Unit­ed States has had for decades,” said social sta­tis­tics expert Luis Avilés, pro­fes­sor of the Grad­u­ate School of Pub­lic Health at the Uni­ver­si­ty of Puer­to Rico.

In addi­tion, to the extent that pover­ty avoids main­tain­ing pre­ven­tive care for chron­ic dis­eases, such as dia­betes or hyper­ten­sion, the health sys­tem will address more seri­ous and com­pli­cat­ed cas­es that may have been avoid­ed. It rep­re­sents a finan­cial bur­den on the health sys­tem,” said Avilés.

The num­ber of home­own­ers decreased in Detroit from 55.41% in 2007 before the Board to 46.57% in 2015.

The con­se­quence this has for the devel­op­ment of com­mu­ni­ties is ter­ri­ble,” Avilés not­ed. When you have few­er peo­ple who are prop­er­ty own­ers in a com­mu­ni­ty, social dete­ri­o­ra­tion increas­es. First of all, because you have peo­ple who do not estab­lish com­mu­ni­ty bonds, because they are peo­ple who rent. Today they rent here and in a year they rent some­where else. Com­mu­ni­ty ties are lost. Then, you have peo­ple there that hard­ly know each oth­er; peo­ple become more tran­sient. Maybe peo­ple do not invest in improv­ing prop­er­ty and the qual­i­ty of res­i­dences drops a lot. Neigh­bor­hoods change dras­ti­cal­ly. So, if there is the pos­si­bil­i­ty of crimes or assaults, they tend to be high­er in places where there are few­er homeowners.”

In Wash­ing­ton, D.C., where the con­trol board, whose name was Dis­trict of Colum­bia Finan­cial Respon­si­bil­i­ty and Man­age­ment Assis­tance Author­i­ty, oper­at­ed from 1995 to 2001, home­own­ers increased from 36.4% in 1990 to 42.7% in 2001. How­ev­er, this increase was accom­pa­nied by the dis­place­ment of peo­ple, most­ly black, by white res­i­dents with high­er incomes, in an urban trans­for­ma­tion process known as gentrification.

Here the rent is expen­sive, because that was one of the strate­gies of the Finan­cial Con­trol Board. In the 1990s, when peo­ple start­ed to get fired, part of the strat­e­gy was to reduce the num­ber of employ­ees in the Dis­trict, and most of the Dis­trict employ­ees under Mar­i­on Bar­ry’s admin­is­tra­tion were Afro and minori­ties. So when you move all those peo­ple, you cre­ate a vac­u­um with­in real estate and hous­ing, and spec­u­la­tors come, buy, sit and wait for the invest­ment cli­mate to change… But that’s part of the wave, even Jesse Jack­son (the civ­il rights activist) com­plained; there were protests here… But there was no Lati­no and Afro coali­tion against the Board’, that did not hap­pen. It man­i­fest­ed itself organ­i­cal­ly, because they saw the Board had to exer­cise its duties. But we did not like the fact that the Board also had the pow­er to destroy your life. Because when they fire you and you’re forty-some­thing, start­ing over… “, recalled Rolan­do Roe­buck, a black Puer­to Rican based in D.C. who worked for the city’s Human Resources Depart­ment from 1979 to 2008.

There are parts of D.C. that were once 100% black and turned white because peo­ple were forced to leave. A friend of mine has a house in an area that was entire­ly black and now his is one of the only two African-Amer­i­can fam­i­lies left; I think that’s gen­tri­fi­ca­tion,” said John Hill, a pub­lic accoun­tant who ini­tial­ly over­saw Wash­ing­ton, D.C. from the Gen­er­al Account­ing Office and from 1995 to 1999 was exec­u­tive direc­tor of the city’s Con­trol Board. Now Hill is head of finance for Detroit and a mem­ber of the Detroit Finan­cial Review Commission.

The over­sight board (Detroit Finan­cial Review Com­mis­sion) has no respon­si­bil­i­ties and no account­abil­i­ty towards the com­mu­ni­ty, nor they care about what they impose on its peo­ple,” said Nieves, who spoke from the liv­ing room of her sub­ur­ban South­west Detroit home, a neigh­bor­hood she describes as pre­dom­i­nant­ly Latin that is also known as Mexicantown.

Hous­es have the typ­i­cal attic cab­in style of Amer­i­can homes, many of which, espe­cial­ly in this city, have been reduced to ruins and con­vert­ed into porno­graph­ic images of pover­ty.” That’s how Nieves describes the tourist prac­tice of com­ing to take pic­tures of the aban­don­ment and dete­ri­o­ra­tion of a city that in the 1950s had a pop­u­la­tion that reached a mil­lion, and now con­sists of just over 600,000 res­i­dents. In Nieves’s street, most of the hous­es are stand­ing and in good con­di­tion. One Sun­day after­noon you breathe a calm, qui­et air in the neigh­bor­hood. She works with immi­grants and peo­ple with addic­tion prob­lems and points out that the Detroit Finan­cial Review Com­mis­sion is dis­con­nect­ed from people.

They have no his­to­ry, no expe­ri­ence with what is going on here, and they are try­ing to be experts in telling us what to do in our community.”

A short dis­tance from down­town Detroit, with its clean streets, a foun­tain round­about and Ford Sta­di­um, a des­o­late land­scape of vacant lots where hous­es were demol­ished pops up. There are brick build­ings in good con­di­tion bor­der­ing the remains of homes that were con­sumed by fire. Diana Ross (the singer), was raised here,” says Detroi­ter Char­lie LeDuff, point­ing to an aban­doned hous­ing com­plex. It is Sun­day and there are no peo­ple or cars near Gra­tiot Avenue. This is Detroit,” says LeDuff, a jour­nal­ist and author of the book, Detroit, An Amer­i­can Autop­sy, at the wheel of his black Cadillac.

The expan­sion of the boards

The mech­a­nism of fis­cal con­trol boards has been in effect since the late 19th cen­tu­ry in the Unit­ed States. It began to expand after the Great Depres­sion of 1930.

Only between 1975 and 2009, there were at least 120 cities and coun­ties where enti­ties of this kind were appoint­ed across the Unit­ed States, accord­ing to Kobes. For 2009, there were 49 of them active in 15 states. There are places with only 171 res­i­dents where a board has been named, like West Mill­grove Vil­lage in Ohio, which is a state where sur­pris­ing­ly 31 boards have been appoint­ed in dif­fer­ent cities and coun­ties in the last decades.

One of the boards that also draws atten­tion for its longevi­ty is in the city of Philadel­phia, Penn­syl­va­nia. It was named since 1991 and is still active.

Since the Great Reces­sion of 2008, many munic­i­pal­i­ties have faced dif­fi­cult fis­cal con­di­tions. Dur­ing these fis­cal emer­gen­cies, states have often inter­vened in an attempt to min­i­mize the dam­age done to cred­it mar­kets and pub­lic safe­ty,” says econ­o­mist and senior deputy state trea­sur­er in the Michi­gan Depart­ment of Trea­sury, Eric Scor­sone, in his paper Munic­i­pal Fis­cal Emer­gency Laws.

In 2016, 28 states, the Dis­trict of Colum­bia and one ter­ri­to­ry (Puer­to Rico) had laws that allow them to inter­vene in the finances of their munic­i­pal­i­ties using con­trol boards, an emer­gency man­ag­er or oth­er mech­a­nism, as James Spi­ot­to, Ann Ack­er and Lau­ra Apple­by point out in the book Munic­i­pal­i­ties in Dis­tress? How States and Investors Deal with Local Gov­ern­ment Finan­cial Emer­gen­cies.

There’s actu­al­ly very lit­tle lit­er­a­ture on con­trol boards,” regrets Alice Rivlin, who presided over the Wash­ing­ton D.C. fis­cal con­trol board from 1998 to 2001, which is emblem­at­ic for being one of the first in mod­ern times.”

The aus­ter­i­ty handbook

In 1995, the Gen­er­al Account­ing Office (GAO) of the Unit­ed States sum­ma­rized the actions tak­en in five cities with fis­cal con­trol boards to improve their finan­cial health. The agency vis­it­ed Boston, Chica­go (with a school board), Cleve­land, New York and Philadel­phia, and report­ed that: All five cities cut costs by reduc­ing the num­ber of their full-time employ­ees. For exam­ple, by 1978, New York reduced its work­force by about 20 per­cent, or 60,000 employ­ees, pri­mar­i­ly through invol­un­tary lay­offs. When it improved its finan­cial health in the 1980s, the city increased its work­force to pre­vi­ous lev­els. Philadel­phia did not reduce its num­ber of employ­ees through invol­un­tary lay­offs. How­ev­er, Philadel­phia nego­ti­at­ed with labor unions, which led to imme­di­ate reduc­tions in ben­e­fits and freeze in wages.”

In Puer­to Rico, the five-year fis­cal plan sub­mit­ted by Gov. Ricar­do Rosselló’s admin­is­tra­tion and approved by the Fis­cal Con­trol Board includes health cuts, wage freezes, reduc­tion of non-essen­tial ser­vices” and 179 pub­lic school clos­ings. In addi­tion, the gov­ern­ment rec­om­mend­ed a $520 mil­lion cut over 10 years to the sub­sidy grant­ed to the Uni­ver­si­ty of Puer­to Rico. Detroit has also imple­ment­ed cost increas­es for col­lege edu­ca­tion, a move New York City made as well under the board. In 1976, amidst the tur­moil of a seri­ous fis­cal cri­sis in the city, the free enroll­ment pol­i­cy was removed under pres­sure from the fed­er­al gov­ern­ment, the state and the finan­cial com­mu­ni­ty to res­cue the city from bank­rupt­cy,” says the CUNY website.

In D.C., the Con­trol Board made cuts in the uni­ver­si­ty that, in Rivlin’s opin­ion, went too far.

The Uni­ver­si­ty was not very effi­cient­ly run and had an aging fac­ul­ty that could be cut back. I wasn’t real­ly part of this deci­sion because I wasn’t on the Board, but I think in ret­ro­spect, they cut too much. They had a hard prob­lem and since they didn’t want to cut schools and they didn’t want to cut social ser­vices, they had to cut some­where and so they did some pret­ty dras­tic cut­ting in some places,” Rivlin said.

In 2004, local funds for the Uni­ver­si­ty of the Dis­trict of Colum­bia were $49 mil­lion, 57% less than in 1990 when it was $113 mil­lion. The largest reduc­tion occurred between 1994 and 1997 — at the cli­max of the D.C. fis­cal cri­sis — when local funds fell by $46 mil­lion. Dur­ing that peri­od, approx­i­mate­ly 40% of the uni­ver­si­ty’s degree pro­grams were elim­i­nat­ed. The num­ber of stu­dents enrolled in cred­it cours­es fell from about 12,000 in 1990 to 5,000 in 2004, accord­ing to The Untold Sto­ry of D.C. Bud­get study, by Ed Lazere and Idara Nick­el­son of the D.C. Fis­cal Pol­i­cy Institute.

Fis­cal con­trol boards fol­low a glob­al­ly test­ed for­mu­la that is well-known for not being effec­tive in improv­ing the qual­i­ty of life of the pop­u­la­tion: austerity.

In some cas­es, the nar­ra­tive and the aus­ter­i­ty sce­nario begin to be built by local gov­ern­ments before the board’s entry. In Puer­to Rico, aus­ter­i­ty mea­sures began to be accen­tu­at­ed in 2009 under the admin­is­tra­tion of for­mer Gov. Luis For­tuño with the approval of a law under which thou­sands of pub­lic employ­ees were dismissed.

By 2015 for­mer Gov. Ale­jan­dro Gar­cía-Padil­la com­mis­sioned a report on the Puer­to Rican government’s fis­cal sit­u­a­tion to econ­o­mist Anne Krueger, for­mer deputy direc­tor of the Inter­na­tion­al Mon­e­tary Fund. The rec­om­men­da­tions of the Krueger Report includ­ed increas­es in tax­es, expen­di­ture reduc­tions, pen­sion reforms, and cuts in the num­ber of teachers.

As for Rivlin, in 1990, before becom­ing chair of the Con­trol Board, she rec­om­mend­ed a $700 mil­lion cut for D.C. in her Rivlin Com­mis­sion Report.

(The Rivlin Com­mis­sion) was not a gov­ern­ment thing. It was a pri­vate­ly fund­ed com­mis­sion, and we had very good peo­ple and a good staff from an account­ing firm, KPMG. And we wrote a report on the future of gov­ern­ment finances. We rec­om­mend­ed sub­stan­tial cuts in spend­ing and staff reduc­tions and mod­ern­iza­tion of com­put­er sys­tems,” said Rivlin, who ran the Fed­er­al Office of Man­age­ment and Bud­get dur­ing Clin­ton’s presidency.

Rivlin’s cur­rent office in the Brook­ings Insti­tute build­ing in Wash­ing­ton, D.C. — where she is a senior mem­ber in the area of eco­nom­ics and health pol­i­cy — is sim­ple. A desk, three book­cas­es and pho­tos of trips, fam­i­ly and oth­ers with Bill Clin­ton or Alan Greenspan, for­mer chair­man of the Fed­er­al Reserve, where Rivlin was vice-chair of the board of gov­er­nors between 1996 and 1999.

At the time when the Fis­cal Con­trol Board was named in Wash­ing­ton, D.C. in 1995, they did a lot of hard work, cut­ting expens­es and rais­ing tax col­lec­tion,” recalled Rivlin, who helped cre­ate the law that imposed the board in Wash­ing­ton, D.C., mod­eled after the Penn­syl­va­nia law.

In Detroit, the rec­om­mend­ed bud­get for fis­cal year 2013, pre­sent­ed by May­or Dave Bing to the City Coun­cil in April 2012, includ­ed the elim­i­na­tion of 2,500 job posts and a $50 mil­lion expense reduc­tion, to align income with expens­es and move for­ward in elim­i­nat­ing the sig­nif­i­cant deficit of the Gen­er­al Fund,” accord­ing to an analy­sis of the bud­get by Scorsone.

A year lat­er, Michi­gan Gov. Rick Sny­der declared Detroit in a fis­cal emer­gency, named Kevyn D. Orr as an emer­gency finan­cial man­ag­er” and the city went bank­rupt under Chap­ter 9 of the fed­er­al bank­rupt­cy code. In 2015, already out of bank­rupt­cy and with the Detroit Finan­cial Review Com­mis­sion in place, a reduc­tion of 6.7% was imple­ment­ed in the pen­sions of 12,000 pub­lic employ­ees and 5,466 edu­ca­tion sys­tem employ­ees were dismissed.

While par­tic­i­pa­to­ry bud­gets are imple­ment­ed in some dis­tricts and cities in the Unit­ed States, such as Boston, in oth­ers where boards are estab­lished, most of them have veto pow­er over the use of the city bud­get, such as Detroit, Wash­ing­ton D.C., New York State, Puer­to Rico and Penn­syl­va­nia. That is, peo­ple do not par­tic­i­pate in how the boards will use the mon­ey tax­pay­ers give, elect­ed offi­cials are lim­it­ed in their abil­i­ty to decide on the use of those funds and deci­sions about the use of pub­lic mon­ey are made by an unelect­ed group, which does not go through any scrutiny.

Accord­ing to Rivlin, the cri­te­ria fol­lowed by the Wash­ing­ton D.C. Fis­cal Con­trol Board to car­ry out lay­offs and bud­get cuts was to pre­serve ser­vices for the low-income population.”

But Lazere, exec­u­tive direc­tor of the D.C. Fis­cal Pol­i­cy Insti­tute, reveals a dif­fer­ent panora­ma: What we had were real­ly sub­stan­tial cut­backs to a lot of things, from edu­ca­tion, hous­ing and so on. There were a lot of things that were need­ed to help peo­ple suc­ceed that were cut in the midst of fis­cal aus­ter­i­ty. We did a study about how the city bud­get had changed from 1992 to 2000, which includ­ed the peri­od of the Con­trol Board. You can prob­a­bly imag­ine the Board say­ing we need to get our finances in order and fix them’ or what­ev­er they said. They went into an aus­ter­i­ty process, despite know­ing there was a high unem­ploy­ment rate and a need to stim­u­late the economy.”

There was room for cut­ting because, what we dis­cov­ered when we did the Rivlin Report was that there were lay­ers of bureau­cra­cy they real­ly didn’t need. Cut­ting back on that was actu­al­ly very good, not for the peo­ple who lost their jobs, but for the effi­cien­cy of the gov­ern­ment,” said Rivlin in an inter­view with the Cen­ter for Inves­tiga­tive Journalism.

Hun­dreds of peo­ple were fired because the Board­’s atti­tude was that there were too many peo­ple doing the same job. With­in the gov­ern­ment there was an atmos­phere of ter­ror because you did not know if you were going to have your lit­tle cham­bi­ta today,” Rolan­do Roe­buck said.

Rivlin recalled that the protests against the Board of D.C. came to her doorstep.

Democ­ra­cy under fis­cal con­trol boards

Com­pared with all the boards that have been appoint­ed in the Unit­ed States since 1975, Puer­to Rico’s is the one that has the most pow­er over a ter­ri­to­ry. That pow­er is com­pound­ed by the colo­nial real­i­ty of the island, which has no rep­re­sen­ta­tion in Con­gress. This makes Puer­to Rico not ful­ly com­pa­ra­ble with a state, but nei­ther with sov­er­eign coun­tries that have expe­ri­enced debt crises such as Argenti­na or Greece. Sev­er­al econ­o­mists agree that the Puer­to Rican gov­ern­ment has more con­trol over its macro­eco­nom­ic pol­i­cy than a state, which must adhere to US nation­al pol­i­cy, but that the island is much more lim­it­ed in that regard if com­pared to a sov­er­eign country.

For econ­o­mist Joseph Stiglitz, one of the major con­cerns about the Fis­cal Con­trol Board imposed in Puer­to Rico is that it implies the loss of sov­er­eign­ty.” Chang­ing from politi­cians to a Board could be good, if you had the right Board. But the risk is they have a Board appoint­ed by Wash­ing­ton politi­cians. And if you look at Wash­ing­ton today, this is no guar­an­tee for suc­cess. Rather it’s like a lot­tery,” the Nobel prize lau­re­ate said dur­ing his recent vis­it to San Juan.

On June 30, 2016, for­mer Pres­i­dent Barack Oba­ma signed the Puer­to Rico Over­sight, Man­age­ment, and Eco­nom­ic Sta­bil­i­ty Act, PROME­SA”, which imposed a Fis­cal Con­trol Board on the non-incor­po­rat­ed ter­ri­to­ry. PROME­SA was based on the Penn­syl­va­nia Inter­gov­ern­men­tal Coop­er­a­tion Author­i­ty, the Dis­trict of Colum­bia Con­trol Board and the Detroit bank­rupt­cy, accord­ing to Spi­ot­to, gen­er­al man­ag­er of Chap­man Strate­gic Advi­sors who tes­ti­fied in Con­gress dur­ing the 2015 dis­cus­sion hear­ings on the the island’s fis­cal cri­sis in sup­port of the approval of the act.

Dur­ing con­gres­sion­al hear­ings on the PROME­SA act, depo­nents such as the Tea Par­ty, for­mer offi­cials and invest­ment fund man­agers, referred to the board as a pow­er­ful fis­cal con­trol board,” which was one of the rea­sons they sup­port­ed leg­is­la­tion. Due to the exten­sive pow­er giv­en to it by PROME­SA, the enti­ty that was named as the Finan­cial Over­sight and Man­age­ment Board is known as the Fis­cal Con­trol Board” by the peo­ple, the media, such as The New York Times and Caribbean Busi­ness, aca­d­e­mics and economists.

On May 3 2017, Puer­to Rico became the first ter­ri­to­r­i­al juris­dic­tion to file for a sui gener­is bank­rupt­cy in fed­er­al court. Debt nego­ti­a­tion of about $70 bil­lion through a process sim­i­lar to Chap­ter 9 bank­rupt­cy will now be heard in court in a process over­seen by Judge Lau­ra Tay­lor Swain, and Puer­to Rico will be rep­re­sent­ed by the sev­en-mem­ber Con­trol Board appoint­ed by Oba­ma on August 31, 2016. Dur­ing the bank­rupt­cy process, the Board will con­tin­ue its inter­ven­tion in oth­er areas, such as the bud­get. The enti­ty, which does not respond to the fed­er­al gov­ern­ment and sends annu­al reports to the Con­gress, gave 14 addi­tion­al days to the gov­ern­ment of Ricar­do Rossel­ló to review the bud­get for fis­cal year 2017 – 2018 sub­mit­ted on May 1.

When is a demo­c­ra­t­ic (enti­ty) jus­ti­fied in turn­ing to non-demo­c­ra­t­ic insti­tu­tions?” asks Kobes, a for­mer stu­dent of Rivlin. In her doc­tor­al the­sis she explores the impli­ca­tions of fis­cal con­trol boards in the gov­er­nance of local governments.

Kobes explains that spe­cial­ized lit­er­a­ture on the sub­ject sug­gests that boards can pro­vide exper­tise and cred­i­bil­i­ty to gov­ern­ments that need access to resources. The dis­ad­van­tage, how­ev­er, is that the boards dimin­ish sov­er­eign­ty, empow­er exter­nal polit­i­cal actors and makes con­ces­sions favor­able to the pri­vate mar­ket. She also says boards can func­tion as scape­goats” that imple­ment unpop­u­lar poli­cies that politi­cians are unwill­ing to impose.

Rivlin had a direct expe­ri­ence with the Board’s scapegoat”-type role, when that enti­ty closed a hos­pi­tal in D.C..

At the very end of my tenure, we looked at this hos­pi­tal sit­u­a­tion and we talked to the May­or and the Coun­cil because we had restored their pow­ers, and they said we agree with you, you’ve got to close the hos­pi­tal and you bet­ter do it before the Board goes; please do it before the Board goes out of busi­ness so they would blame you and not us.’ So we did it right I think. We did close the hos­pi­tal, the inpa­tient facil­i­ty, and we estab­lished a new fund to pay the hos­pi­tal expens­es of peo­ple who were not eli­gi­ble for Med­ic­aid,” Rivlin said.

One of the sim­i­lar­i­ties Wash­ing­ton, D.C. had with Puer­to Rico was its large deficit. The dif­fer­ence is that D.C. had no debt prob­lems, Rivlin explained. Not all cities where a board has been appoint­ed have declared bank­rupt­cy. Anoth­er sim­i­lar­i­ty is that in D.C., as in Puer­to Rico, the con­trol board that oper­at­ed for 10 years (from 1995 to 2001) took con­trol of sev­er­al agencies.

The May­or no longer had respon­si­bil­i­ties for the nine largest depart­ments in the city. They report­ed to the Con­trol Board and we had a Chief Man­age­ment Offi­cer who ran the city for the May­or. We had the abil­i­ty to sit beside the elect­ed School Board and take over the schools and cre­ate our own board. So it was, (the Washington,D.C. Board) had a lot more pow­er and author­i­ty (than Detroit) to act and had much more involve­ment in the man­age­ment of the city,” John Hill recalled at his office in Detroit.

The Wash­ing­ton, D.C. con­trol board could pass leg­is­la­tion for the city of Wash­ing­ton D.C.. We nev­er did but we could. We could knock out every piece of leg­is­la­tion. The con­trol board could also sub­mit its own bud­get for the city, it could hire or declare which government’s ser­vices were no longer need­ed. So it was a very pow­er­ful Con­trol Board,” Hill said.

Com­pared with the expe­ri­ence of Wash­ing­ton, D.C., the com­mis­sion that per­forms the func­tions of con­trol board in Detroit does not man­age the city at all; it’s the may­or who runs the city,” Hill said hours before attend­ing the month­ly meet­ing of the Com­mis­sion that day.

At the meet­ing there is a dig­i­tal clock that marks the num­bers in red. It is on the right side of the tables where the mem­bers of the Detroit Finan­cial Review Com­mis­sion sit in a large room. It’s Feb­ru­ary and this is their month­ly meet­ing in a suite at Cadil­lac Place; a neo­clas­si­cal 15-sto­ry build­ing that once head­quar­tered Gen­er­al Motors in the New Cen­ter neigh­bor­hood of Detroit, Michigan.

The meet­ing of the Detroit Finan­cial Review Com­mis­sion is pub­lic. Out­side, where the tem­per­a­ture is at 34 degrees, there is no protest. At the entrance there are no police or check­points; nobody asks for iden­ti­fi­ca­tion. At the end of the meet­ing peo­ple have two min­utes to make com­ments. The clock, which had been stopped while the mem­bers of the Com­mis­sion spoke, begins to blink until an alarm sounds. Pub­lic com­ments are always interrupted.

It’s sort of a frus­trat­ing pro­ce­dure because they don’t get any real sat­is­fac­tion oth­er than to be able to stand up and talk,” said Ron Rose, the Commission’s exec­u­tive director.

They pro­vide us a small space to say some­thing in a mat­ter of two min­utes. Who can say any­thing real­ly sub­stan­tial in two min­utes, and spe­cial­ly when it is some­thing so emo­tion­al and so deep?,” said Adela Nieves.

The bit­ter­sweet taste of fis­cal con­trol boards

Ron Rose, a retired bank­rupt­cy judge, was hired in 2015 as exec­u­tive direc­tor of the Detroit Finan­cial Review Com­mis­sion. Two years lat­er he is sat­is­fied with the Com­mis­sion’s approach to the Detroit fis­cal cri­sis, but with one exception.

The may­or is very excit­ed and we (the Com­mis­sion) are not. And after three years of bal­anced bud­gets, when the audit­ed finan­cial state­ments for fis­cal year 2017 come out, we (the Com­mis­sion) have to give up our rights and duties, unless they vio­late the terms of the statute… I would have pre­ferred (the Com­mis­sion) could have stayed for a longer peri­od of time, because we had very large prob­lems… Pen­sions are a finan­cial prob­lem. The oth­er big prob­lem in the city that the may­or has to deal with is that of the schools,” said Rose.

Kobes men­tioned that the Con­trol Board starts from the premise that the prob­lems emanate from local gov­ern­ments that are not able to make the right deci­sions. And that’s true in some cas­es. But I think it’s usu­al­ly more of a mix, that they just do not have the funds, because they have a poor econ­o­my. Now, chang­ing admin­is­tra­tion is not going to fix that. Like­wise, there are exter­nal restric­tions that do not have to do with local admin­is­tra­tion, such as the expens­es they need to make, the lim­i­ta­tion of tax­es that do not allow them to raise more mon­ey or if there has been a decrease in aid. One thing that wor­ries me about Con­trol Boards is that they blame local politi­cians, when they real­ly are not the source of the prob­lem, and I think that leads to solu­tions that do not work, because until you do not deal with the prob­lem ade­quate­ly, you will not solve it. I think that in the long run that takes away local democ­ra­cy, because it implies that local politi­cians are inca­pable, when they real­ly could be part of the solu­tion,” Kobes said.

What do you think about the exit of the Finan­cial Review Com­mis­sion? The CIJ asked Detroit May­or Mike Duggan.

It will end in 2018. It will not be until the begin­ning of 2018 that we make that deci­sion, we must first have the bud­get (in Decem­ber) of 2017. We are work­ing on that, that is what we are try­ing to do,” said Dug­gan rush­ing out of the Com­mis­sion meet­ing, in which he has a seat and vote.

In some cas­es, the State impos­es the fis­cal con­trol board. In oth­ers, the cities or coun­ties request the State inter­ven­tion. And some­times, they regret it.

Such is the case of Rhode Island, where the city of Cen­tral Falls request­ed aid from the state court for its finan­cial prob­lems and was put under receiver­ship in May of 2010. This city has a lit­tle more than 19,000 inhab­i­tants (60% Lati­nos) and its Gen­er­al Oblig­a­tions debt reached almost $20 mil­lion. In response to the request for judi­cial admin­is­tra­tion, the Rhode Island leg­is­la­ture passed, and Gov. Don­ald Carcieri signed, a law allow­ing for pro­gres­sive state inter­ven­tion in its munic­i­pal­i­ties in cri­sis, such as Cen­tral Falls.

The law passed in Rhode Island was pos­si­bly an attempt to pre­vent munic­i­pal­i­ties from restruc­tur­ing their debts with tac­tics that might be unfriend­ly to the munic­i­pal mar­ket.” The City of Cen­tral Falls attempt­ed to chal­lenge the new statute, but a state court ordered keep­ing the con­sti­tu­tion­al­i­ty of the state-appoint­ed admin­is­tra­tion. In Novem­ber 2010, the new super­vi­so­ry body exer­cised its pow­er to dis­solve the Cen­tral Falls coun­cil and replace it with a three-mem­ber advi­so­ry coun­cil,” explains the book Munic­i­pal­i­ties in Distress?

In 2010, Cen­tral Falls faced insol­ven­cy due to strong state aid cuts, income short­falls and lack of funds for about $80 mil­lion in pen­sions and retiree health ben­e­fits. In 2011 it declared bank­rupt­cy, which assured access to the bond mar­ket but neg­a­tive­ly affect­ed the city. In 2012, it emerged from bank­rupt­cy with elect­ed offi­cials with­out pow­er, with prop­er­ty own­ers fac­ing tax hikes every year and retired pub­lic employ­ees with pen­sion cuts,” Reuters reported.

Orig­i­nal­ly, the PROME­SA Act that imposed a Fis­cal Con­trol Board in Puer­to Rico in 2016 applied to the ter­ri­to­ries of Guam, Amer­i­can Samoa, the North­ern Mar­i­ana Islands and the U.S. Vir­gin Islands. But the U.S. Vir­gin Islands del­e­gate to Con­gress, Stacey Plas­kett, pro­posed an amend­ment for the law not to apply to those ter­ri­to­ries. The amend­ment was approved in June 2016 and was cel­e­brat­ed by Plas­kett as a sig­nif­i­cant vic­to­ry.” How­ev­er, these ter­ri­to­ries could be cov­ered by PROME­SA if their bond­hold­ers sub­mit claims, accord­ing to Tom Bolt from the Bolt­Na­gi law firm.

Puer­to Rico’ Board may reject bud­gets that do not meet the cri­te­ria of the fis­cal plan and sub­mit its own bud­get, has leg­isla­tive veto pow­er and could sanc­tion or dis­miss pub­lic offi­cials. It has already approved gov­ern­ment-sub­mit­ted fis­cal plans that include increas­es in the water bill start­ing Jan­u­ary 2018, pri­va­ti­za­tion of the Urban Train and the High­way Author­i­ty oper­a­tions, and 11 crit­i­cal infra­struc­ture projects, whose main focus is nat­ur­al gas and incin­er­a­tion. In March, the Board hired Natal­ie Jaresko as its exec­u­tive direc­tor. The for­mer Ukrain­ian finance min­is­ter will be chauf­feured, escort­ed by secu­ri­ty and earn $625,000 a year, near­ly five times the salary of the exec­u­tive direc­tor of the Detroit Finan­cial Review Com­mis­sion, Ron Rose, whose annu­al salary is $130,000, or more than twice of Kevyn Orr’s salary while he was Detroit’s Emer­gency Man­ag­er for $275,000 annually.

Lau­ra Moscoso and Dignel­ly Tor­res col­lab­o­rat­ed with this story. 

This inves­ti­ga­tion is pub­lished in part with the sup­port of the Rav­itch Fis­cal Report­ing Pro­gram, at the City Uni­ver­si­ty of New York (CUNY) Grad­u­ate School of Journalism.

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