Last week brought news highlighting the severity of the fiscal distress facing Atlantic City, New Jersey. According to a new report released by the city’s Emergency Manager Kevin Lavin (and consultant Kevyn Orr, fresh off his stint as Detroit’s emergency manager), the city faces a liquidity crisis in the coming months, with the city currently facing a $101.1 million budget deficit this year and another $47.1 million deficit in the school system.
Declining property tax receipts from a 64% devaluation of the city’s property tax base, plus the closure of some casinos and millions in successful tax appeals by other casinos, are the main culprits. Overall, the report projects that if nothing were to change, the city’s deficits would spiral to a cumulative $393 million over the next five years.
While Lavin and Orr have publicly stated that they intend to avoid bankruptcy, their report points out that the city’s government will need to be significantly downsized to adjust to the new normal of a lower revenue base. Several proposals in the legislature that would increase state aid and create new revenue streams to the city face uncertain prospects, and credit ratings agencies are skeptical of the viability of the emergency manager’s proposed action plan, suggesting additional credit downgrades are a real possibility.
Among the downsizing strategies Lavin and Orr propose to pursue are eliminating operational inefficiencies, reducing the city’s headcount, exploring outsourcing/consolidation opportunities, reducing costs through “regionalization” (e.g., intergovernmental contracting, shared services, etc.), and maximizing/leveraging assets. The recent experience of Pontiac, Michigan-which went through a similar process over the last several years-offers a good example demonstrating that major changes along these lines are indeed achievable in a relatively short timeframe.
Like Atlantic City, Pontiac was facing a high debt load and chronic budget deficits, prompting state officials to appoint an emergency manager to take over city operations in 2009. During Pontiac’s time under emergency manager control between 2009 and 2013, it saw a massive reduction in the city workforce from over 500 non-court employees down to just 20 (a 96 percent reduction), the reduction of city debt from $115 million to $28 million, and the lowering of general fund expenditures to $30 million, which is almost half what the city spent prior to its emergency situation.
Many of Pontiac’s downsizing initiatives occurred under the tenure of former Emergency Manager Louis Schimmel from 2011 to 2013, including:
- Contracting out approximately 20 city functions, including trash collection, building services, and road and streetlight maintenance, as well as administrative support functions like IT, auditing and budget administration, and legal services.
- Entering into intergovernmental agreements with Oakland County and other public entities to take over police and fire services, 911 dispatch, water and wastewater operations, and animal control services.
- The sale of several city assets, including a golf course, city land and buildings and excess water/wastewater capacity.
- The consolidation of over 80 retiree health care plans to just one.
Schimmel detailed many of these initiatives in a 2014 Reason Foundation interview. He concluded that:
“As a result of all of our work, we were able to right the ship. We’ve downsized the expenditures and improved the services. We’ve gone from spending $57 million per year-and not having the greatest services-to spending $30 million per year and having much better services. So I think it’s a rosy picture from that standpoint.
However, the general fund is razor thin, and there’s no room for mistake at this point.”
In August 2013, the city’s progress prompted Gov. Rick Snyder to remove Pontiac from emergency manager control, and a four-member transition advisory board now oversees the city’s finances and progress at maintaining its fiscal health.
While Lavin and Orr are certainly no strangers to dealing with major government restructurings, they may nonetheless find some solace in Schimmel’s advice:
“In places like Pontiac, Flint and Detroit, the people in power want to talk about everything else other than the real problem issues. They want to talk about getting grant money, having the state kick in more money, economic development, etc. I’ve always said that before you do any of that-begging for money from other places-you really need to fix what you’ve got, because nobody wants to help you until you do that.
You have to make all of the types of changes that we’ve done in Pontiac first. Then, if you get to the bottom of that list of doing what you ought to-which is running an efficient city through privatization, asset sales and other fixes-and just deal with providing the basic services that cities need to-like police, fire, trash and public works-once you’ve done all of these things, then you can see where you are and what else may or may not be necessary.[…] For a new emergency manager, I’d advise them that one thing to expect when they step in is a lot of people telling them what they cannot do-you can’t privatize, you can’t sell assets, you can’t consolidate a fire department, etc. My response to that is-yes you can, and I believe we’ve set up a good template to prove that in Pontiac. You’ve got to have the conviction that these things can be done and can’t let yourself be talked out of it. I did it all, so I know it can be done.”
It’s important to note that Lavin and Orr face a different set of challenges than Pontiac’s emergency managers-primarily, that under Michigan law an appointed emergency manager is granted broad authority over city operations, budget decisions, contracting, asset divestiture, labor agreements and the like. By contrast, New Jersey does not have a comparable law-the appointment of Atlantic City’s emergency manager was the result of an executive order issued by Gov. Chris Christie-and thus Lavin does not have operational autonomy and must work collaboratively with local elected officials.
Still, Pontiac’s experience suggests that a dramatic rethinking of the structure of government-without bankruptcy-is indeed possible if leaders embrace bold, and sometimes politically unpopular, solutions in the short-term with an eye towards establishing long-term financial sustainability.
Leonard Gilroy is director of government reform at Reason Foundation.