Tiptoeing Back into the Municipal Market after Municipal Bankruptcy


March 6, 2015
Visit the project blog: The Municipal Sustainability Project

Stepping into the Fiscal Future. The Michigan Senate Committee on Banking and Financial Institutions has cleared the way—on a bipartisan, unanimous vote, to report legislation to the full body to provide the Motor City a statutory lien to city income tax revenue—creating a key revenue stream to back Detroit’s financial recovery bonds, even as Detroit’s compensation commission is gearing up to determine if the city’s elected officials should receive a pay increase: Detroit’s seven-member Elected Officials Compensation Commission expects to meet several times in the coming weeks—with a 45-day time frame to determine the compensation of Detroit Mayor Mike Duggan, City Council members, City Clerk Janice Winfrey, and members of the Board of Police Commissioners. While Mayor Mike Duggan has made clear he is not seeking a raise, Council President Brenda Jones yesterday testified at a hearing before the commission making the case for higher pay—telling the Mayor’s staff that the compensation issue is “very sensitive: I’m extremely sensitive to it. I don’t have any problem speaking up for myself. None whatsoever.” Council President Jones testified to the compensation commission about her lengthy work days, which she said frequently exceed 12 hours, and she testified that the council has not been awarded a raise since 2001―and took a voluntary 10 percent pay reduction in 2010. In addition, Council President Jones informed the panel that her role and responsibilities have changed as a result of the city’s historic bankruptcy. The pay raise issue comes in the wake of former Emergency Manager Kevyn Orr’s action last year to institute a 5 percent pay increase last year for Mayor Duggan, council members, and other non-union city workers, as well as to implement a five-year agreement with a coalition of city unions that outlined restorations for 3,500 workers who had their wages frozen in 2010 and later reduced by 10 percent. Council members had been making $73,181 and the council president was paid $76,911. With the increase, the totals were $76,840 and $80,757 for Council President Jones. For their part, Commission members—as they seek to understand the revised state role vis-à-vis Detroit under the terms of the city’s federally approved plan of debt adjustment over the next decade, also have sought information from Detroit’s Law Department on the impact of the municipal bankruptcy and whether their decision on raises is subject to the approval of the state-mandated Financial Review Commission. The compensation commission, which meets in odd-numbered years, has a 45-day window in which to act on the requests.

Opening the Door to Investing in the Future. Meanwhile, in the chillier northlands of Lansing, the Michigan Senate Committee on Banking and Financial Institutions voted 7-0 to report and send legislation, SB 160, intended to facilitate Detroit’s first reentrance into the public debt markets since its exit from municipal bankruptcy. Or, as one committee member, State Sen. Darwin Booher (R-Evart) who represents Benzie, Crawford, Kalkaska, Lake, Leelanau, Manistee, Mason, Missaukee, Ogemaw, Osceola, Roscommon, Wexford counties, said in an email to the irrepressible Caitlin Devitt of the Bond Buyer: “I sponsored SB 160, because I believe this is common sense legislation and we should be encouraging ways to save the taxpayers money…Even though I am from a small town in northern Michigan, I recognize how important the recovery of Detroit is to the entire state of Michigan.” The bill is limited only to Michigan cities with a population of more than 600,000―thereby restricting the benefits to a club of one: Detroit. As reported, the bill would give a statutory lien to city income tax revenue backing Detroit’s financial recovery bonds. That revenue source reflects that Detroit, which has one of the broadest tax bases of any city in the U.S., has the income tax as its largest single source, contributing about 21 percent of total revenue—a key source for Michigan municipalities, where state law prohibits cities from increasing revenues by adding a sales tax or raising residential property tax rates more than inflation. It is, as a result of the unprecedented so-called grand bargain, a more healthy revenue source, because the state, as part of its increased partnership in working with the city on its municipal bankruptcy plan of debt adjustment, agreed to changes in state law to address non-collection: a Detroit city-commissioned study by McKinsey and Company reported three years ago that an estimated $6.6 million of municipal income taxes on commuters who work in Detroit, $21.8 million in corporate taxes, and $155 million of income taxes on residents were not collected in 2009—or nearly 50 percent of the taxes owed from people living in or working in the city. The report also determined that 54 percent of city residents who worked outside the city did not pay; in Michigan their employers are not required to withhold city taxes—resulting in a shortfall of an estimated $142.3 million. As reported, however, the legislation would essentially apply only to a $275 million municipal bond that the Motor City privately placed with Barclays last December on its final day in bankruptcy; it marks the only time the city has tapped its income tax revenue to secure bonds. The bonds, now in a variable-rate mode, are to be resold on the public market in a fixed-rate mode within 150 days of the December placement date, unless Barclays grants an extension. Supporters believe SB 160 will boost investor confidence in the bonds with a statutory lien that is expected to make the bond revenue fully protected in the event of another bankruptcy or default by Detroit—it also marks the first time the city has gone to the public markets since its formal exit from chapter 9 municipal bankruptcy. Fiscal analyst Elizabeth Pratt with the Michigan Senate Fiscal Agency said in a fiscal note that the city could see debt-service savings of $2 million to $3 million a year with the lien―estimates derived from the Motor City’s own figures. The revenue would enjoy the lien and be held in a trust for the benefit of the bondholders regardless of whether the city directly collects the revenue, a third party collects it, or anyone else, according to the legislation.

The Messy, prohibitively Expensive, and daunting Challenges of Municipal Bankruptcy & The Remarkable Differences Imposed by Contrasting State Enabling Laws


March 5, 2015
Visit the project blog: The Municipal Sustainability Project

Savoring the Comeback. Standard & Poor’s this week revised its long-term outlook on Central Falls—or Chocolateville’s―credit rating on its full faith and credit GO bonds from stable to positive, even as the small city retained its junk-level BB long-term rating. The post municipal bankruptcy city, Rhode Island’s smallest (19,000 population), continues on its road to recovery in the wake of then-Governor Lincoln Chaffee appointment of former Rhode Island Supreme Court Justice Robert Flanders as receiver in the wake of its filing for municipal bankruptcy protection in August 2011, reporting an $80 million unfunded pension liability. In one of Judge Flanders’ earliest actions, he imposed benefit cuts of up to 55% for retirees—albeit these reductions were subsequently modified by the former Chafee administration. S&P analyst Victor Medeiros wrote: “The outlook revision reflects our opinion of the city’s ongoing adherence to its established post-bankruptcy plan and improved financial management controls that we believe will likely be sustained and continue to translate into it maintaining stable operations…At the same time, we expect the city to remain proactive in funding its long-term liabilities, ensuring those costs and overall budgetary performance remain stable and strong over the long term.” According to Mr. Medeiros, for S&P to consider raising Central Falls’ rating, Chocolateville would need to adhere to its to its long-term plan of debt adjustment: “In our opinion, the city’s stable budgetary environment and continued progress toward funding long-term liabilities would be additional factors in our raising the rating.”

Expanding Municipal Bankruptcy Protection. California State Sen. Marty Block has introduced legislation to expand chapter 9 municipal bankruptcy protection to school district general obligation bonds. The bill, Senate Bill 222, would amend section 15251 of the California Education Code to clarify the process of lien perfection for general obligation bonds issued by or on behalf of California school and community college districts—a change which is intended to clarify that the lien that is created is a “statutory” lien, thereby potentially reducing the risk of bankruptcy for G.O. bonds issued by K-14 general obligation bond issuers in the Golden State—and, its author hopes, potentially enhancing the districts’ credit ratings and reducing their interest rates—an action which some believe would remove the extra step between the issuance of general obligation bonds by a school or community college district and the imposition of a lien on the future ad valorem property taxes that are the source of repayment of the G.O. bonds. The bill’s introduction comes in the wake of uncertainty over potential treatment of revenues pledged to pay a municipality’s general obligation bonds—and the mechanisms under differing state laws with regard to the imposition of liens to secure the repayment of full faith and credit bonds issued by cities, counties, and school districts—or as the ever-marvelous Municipal Market Analytics describes it, the bill “clarifies that voter-approved general obligation school district bonds benefit from a statutory lien on the levy and collection of the tax revenues without any further action, insulating them from impairment in a Chapter 9 proceeding,” an action which should, according to MMA, reduce the cost of the debt to the issuing school district—especially for more fiscally challenged ones. Fabulous Matt Fabian of MMA notes that recent municipal bankruptcy cases like Detroit’s have raised questions about the strength of a city or school district’s pledge, making it, in his words, “imperative that states examine statutes to ensure that they are clear in their intent.” The underlying issue (no pun) relates to – in bankruptcy – secured and unsecured claims, ergo, the need to ensure a lien is statutory, as opposed to one created by an agreement to create a security interest. Sen. Block’s proposed legislation would clarify that the statutory lien arises automatically without further action or authorization by the school or community college district.

Detroit’s Future. Michigan Gov. Rick Snyder expects “relatively quick legislative action” from the state’s legislature as soon as the Coalition for the Future of Detroit Schoolchildren submits its final report examining the school’s fractured, fragmented, and nearly insolvent school system and recommendations later this month. The coalition is co-chaired by Tonya Allen, president and CEO of the Detroit-based Skillman Foundation; the Rev. Wendell Anthony of Fellowship Chapel and the president of the Detroit branch of the NAACP; David Hecker, president of AFT Michigan/AFL-CIO; John Rakolta Jr., CEO of Detroit-based Walbridge Aldinger Co.; and Angela Reyes, executive director of the Detroit Hispanic Development Corp.

State of the City. San Bernardino Mayor Carey Davis, armed with 500 opinions from citizens in the wake of a series of community engagement events intended to both keep citizens apprised of the city’s plans to put together its plan of debt adjustment in order to secure U.S. Bankruptcy Judge Meredith Jury’s approval so that the city could exit municipal bankruptcy, but also to seek their input through a series of community events, tomorrow evening reports back on what he sees as the state of his city—and what he believes the city’s future could be, marking his first such speech since he took office a year ago. In a release from his office, the Mayor said: “The State of the City address brings together the business community, our educational institutions, residents, and others who have a vested interest in San Bernardino’s future…I look forward to highlighting accomplishments over the last year, and hope to build upon those successes as we move forward into 2015 and beyond.” The ambitious effort to both inform and seek input from citizens and taxpayers informs us of the significant differences prescribed or permitted under differing state statutes of those states which enable municipalities to file for federal bankruptcy protection—so that in Michigan and Rhode Island, for instance, cities’ elected leaders, citizens, and taxpayers are excluded from any say or input in the process; but in Alabama, California, and other states; the messy, prohibitively expensive, and daunting challenges of public, democratic practices compel local leaders to inform, engage, and involve citizens and taxpayers.

Exiting Municipal Bankruptcy Does Not Necessarily End a Municipality’s Fiscal Challenges


March 3, 2015
Visit the project blog: The Municipal Sustainability Project

Sewer & Suer Rats. In a federal filing on which U.S. District Judge Abdul Kallon has scheduled trial to commence this July, the Securities and Exchange Commission (SEC) has filed a motion for summary judgment in its securities fraud case against two former JPMorgan bankers who were involved in Jefferson County’s more than $3.2 billion in sewer deals and swaps, [SEC v. Charles LeCroy & Douglas MacFaddin], writing that its case proves that Messieurs LeCroy and MacFaddin violated the securities act by failing to disclose payments to others who did no work on swaps between the county and JPMorgan―swaps which imposed higher fees on Jefferson County, and imposed higher rates on Jefferson County sewer system customers. The SEC wrote that Messiers LeCroy and MacFaddin also failed to disclose information about payments that would have been material to bond investors―even if the payments did not increase the county’s costs: “Any reasonable investor would have wanted to know that bonds in which he or she was investing were being offered by an underwriter who had procured the county’s business through a corrupt process of paying off friends and associates of [county] commissioners.” The swaps at issue were a key driver that forced what was, at the time, the largest municipal bankruptcy in U.S. history.

Will Hillview Have to Bite the Bullitt? S&P has downgraded Hillview, a 4th-class city in Bullitt County, Kentucky, with a population of approximately 8,172, from A- four notches to BB-plus, with S&P credit analyst Scott Nees noting: “The downgrade to ‘BB+’ reflects, in part, our view of the going concern opinion in the fiscal 2014 audit, in which the city’s auditor expressed doubts regarding Hillview’s ability to continue as a going concern.” Mr. Nees wrote that the circumstances reflect the unsuccessful appeal of a legal judgment where a jury determined that Hillview was in breach of contract (the breach involved a land purchase contract with a local trucking school, with damages of $11.4 million assessed against the city). Subsequently, a year ago, the state of Kentucky Court of Appeals delivered a decision affirming the Bullitt County Circuit Court’s prior decision dating back to 2012 that the city breached a land purchase contract with a local trucking school. The $11.4 million is currently accumulating interest at 12% per year and is not covered by the city’s insurance policy, but it represents nearly 1,000% of the small city’s cash on hand of $960,713 at the end of its most recent fiscal year (June 30, 2014). Mr. Nees added: “The negative outlook reflects our view of the potential for the deterioration in credit quality that could accompany a court decision against the city, the auditor’s going concern opinion in the city’s most recent audit report, and management’s inability to articulate a plan should Hillview be required to pay the settlement.” If the Kentucky Supreme Court sides against the city, S&P notes any subsequent rating will depend largely on the city leadership’s response—a response which could involve a settlement through the issuance of long-term debt—or a filing for chapter 9 municipal bankruptcy protection—an option which S&P understands the city’s leaders are considering. Under Kentucky law (Ky.Rev.Stat.Ann. §66.400), any taxing instrumentality may file a petition for municipal bankruptcy.

Is New Jersey Gambling with Atlantic City’s Future?


March 2, 2015
Visit the project blog: The Municipal Sustainability Project

Spinning for Municipal Bankruptcy: In the Red or Black? Try and imagine the intractable quandary of Atlantic City Mayor Don Guardian: his Governor, Chris Christie, appears not only determined to crash land the city into municipal bankruptcy, but has also imposed an emergency manager—without any guidance which official is really in charge; the city’s assessed property values are plummeting; and the city’s plans to fix the way its casinos pay property taxes appears mired in inaction in the state legislature. These are all issues of time—a luxury the city does not have. In his State of the City presentation last week, Mayor Guardian had pledged to “do everything humanly possible” to avoid a property tax increase this year—even though the official budget he will present to the Council in June will come in at $235 million, a $30 million drop compared to FY2014: he noted that Atlantic City’s assessed total property values will soon be assessed at $7.35 billion, down from a high of about $20 billion. In the face of that decline, the city underspent its 2014 budget by $10 million, according to the Mayor―a savings that can be applied to cash-flow needs in the coming year. In addition, Mayor Guardian said city staffing will have been reduced by 200 positions as of June, but he told his colleagues that has not adversely affected the quality of municipal services, because of increases in efficiency: noting official statistics demonstrating drops in crime along with fewer public complaints lodged against the police. By the end of this month, Atlantic City will have reduced its police force by nearly 15 percent down to 285 active police officers from 330. Mayor Guardian reported, moreover, that all patrolling officers will receive body cameras, while a new computer system will allow the department to prioritize resources in real time; the city’s municipal court will operate 8-10 hours a day, four days a week, allowing officers to return to street patrol on the fifth day. Nevertheless, Mayor Guardian told his colleagues the city’s debt remains his front and center issue, noting he was supporting state legislation to redirect casino taxes to debt service, and that the city will, by the end of the month, attempt a $52 million bond sale covering the $12 million it recently borrowed and the $40 million it owes back to the state. On the revenue side, he praised new development initiatives, such as those taken on by Stockton University, Boraie Development LLC, and Bass Pro Shops―all of which have helped to create a double: create new jobs, and enhance the city’s tax base. Nevertheless, he made clear how critical new forms of state assistance are to Atlantic City’s solvency, telling his Councilmembers Atlantic City receives far less than many other municipalities in school and budgetary aid and advocating that a greater percentage of revenues from the city’s room, luxury, and parking taxes should be returned to the municipality generating them: “Atlantic City isn’t a step child.” Reminding his colleagues that last year – a “terrible” year ― Atlantic City still brought in $700 million in taxes, clarifying: “We’re not asking for a buyout…We’re asking for a little of that $700 million to come back to Atlantic City.” In response, Council President Frank Gilliam offered support for Mayor Guardian’s presentation, but said the council must continue to look for further ways to cut the 2015 budget. He said council aims to put forward its own budget in March, before emergency manager Kevin Lavin produces his findings.

Coming up Lemons? Mayor Guardian’s please for a better return of the revenues the city has previously sent to the state, however, risk coming up three lemons: A quarter of the year after the “Casino Property Taxation Stabilization Act,” or payment in lieu of taxes (PILT) plan was in the state legislature as a means to transform the way Atlantic City casinos pay property taxes, there has been little, if any progress. Under the proposed legislation, casinos would no longer pay property taxes; instead, they would cumulatively make $150 million in PILT payments annually for two years, then $120 million for each of the next 13 years. The key sponsors, New Jersey Senate President Stephen Sweeney, Sen. Jim Whelan, and Assemblyman Vince Mazzeo describe the bipartisan bill as one which would help Atlantic City escape from the perennial property-tax appeals which, for years, have made fiscal planning a nightmare for Atlantic City, because challenging the city’s assessments in court has become almost as routine as spinning the roulette wheel for casino operators. Nevertheless, the bill, part of President Sweeney’s five-card Monte package of bills to come to the fiscal rescue of Atlantic City remain spinning without stop in the legislature. Even the Casino Association of New Jersey, has pressed the legislature for favorable spins, lobbying that the legislative proposal was the only cure for Atlantic City’s reeling gambling industry, which has seen about half its revenue disappear since 2006: “Make no mistake. Without this plan, certain casinos that remain in Atlantic City are at risk.” Nevertheless, the proposal appears iced over: despite sailing through committees last December, state Democrats have repeatedly balked at putting the legislation to a general vote: but no one appears to have an explanation why. One issue could be uncertainty with regard to Gov. Christie’s position: he has never publicly supported the proposed legislation—and, last week, did not return a request for comment about the bill.

A Chilling Credit Wind in the Windy City. Credit rating agency Moody’s has dropped Chicago’s credit rating to its second lowest investment grade, with analysts Rachel Cortez and Matthew Butler noting: “The main thing is that another year has passed and gone by without a solution to the pension issues, both with respect to curbing the growth in the unfunded liabilities and dealing with the police and fire pension spike that is getting closer and closer.” The decision, coming in the midst of Mayor Rahm Emanuel’s runoff campaign for re-election (he faces an April 7 runoff versus Jesus “Chuy” Garcia, a Cook County board commissioner), risks both the city’s reputation—and likely will adversely impact its costs of borrowing—or, as the prescient president of the Chicago Civic Federation Laurence Msall put it: “This is wakeup call for anyone still asleep as to the precarious financial condition of the state of Illinois and many local units of government especially Chicago…The downgrade has immediate financial costs to the taxpayers and puts enormous additional financial pressure on the city’s budget which is dependent on access to the credit markets.” Last month, the Federation had noted that between FY2004 and FY2013 the long-term debt for eight major Chicago governments had risen by just under 60 percent over the last decade to $20.4 billion; but mayhap more worriedly, long-term direct debt per capita rose at a faster rate, increasing by 66.8% from $4,504 to $7,514. A key concern is the city’s $20 billion unfunded pension tab. Moody’s decision means the Windy City now has a lower credit rating than all other major cities with the exception of Detroit. Nuveen lists Chicago as a pre-distressed credit which is “getting to a pretty critical point.” In their report, the Moody analysts wrote that their lowered credit rating “incorporates expected growth in Chicago’s already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned in legal appeal,” adding that Chicago’s tax base is significantly leveraged by the direct debt and pension obligations of the city, as well as indirect debt and pension obligations of overlapping governments—albeit partially offset by the significant improvements Mayor Emanuel has achieved in structurally balancing its budget and strong economic base. Indeed, the Mayor’s office responded to Saturday’s moody report with a statement: “We strongly disagree with Moody’s decision to reduce the city’s credit rating and would note that Moody’s has been consistently and substantially out of step with the other rating agencies, ignoring the progress that has been achieved.” Fitch, indeed, last week affirmed its A-minus rating and negative outlook, whilst S&P affirmed its A-plus rating and negative outlook last Friday. The city has for years faced a reckoning on its public safety pensions in 2016 when a longstanding state mandate to stabilize public safety systems through actuarially based funding kicks in, driving Chicago’s annual contribution up by $550 million.

The Challenging, but Critical Role of Schools in Municipal Fiscal Sustainability


February 27, 2014
Visit the project blog: The Municipal Sustainability Project

Blueprint for the Motor City’s Future. Detroit’s Coalition for the Future of Detroit Schoolchildren, the Motor City’s 36-member community commission assessing how to better serve the city’s children—and facing a March 31 deadline, has now achieved consensus that a single governing authority should oversee the nurturing of Detroit’s 119,000 school-age children―regardless of where they attend public school―or, as two members confirmed to the Detroit Free Press yesterday: “There is consensus on that because one of the things we have to have are some clearly defined educational objectives for all our children…You can’t have the Detroit Public Schools having one academic achievement design, and the Michigan Education Achievement Association another, and charters having something else. If you have a child that attends school in Detroit, regardless of entity, there are certain academic standards that should apply universally. How you address those may be up to you, but the standard itself should apply unilaterally.” The coalition’s challenge is brutal: In the Motor City today, there are 97 Detroit Public Schools (DPS), about 100 charter schools, and 15 schools in the Education Achievement Authority (the district for Michigan’s lowest-performing schools). According to DPS officials, the city has about 20,000 more seats than students, and about half of Detroit’s school-age children attend charter schools. DPS has been run by a state-appointed emergency manager for six years and has been paying down its $169.5-million deficit, using part of the per-pupil allotment it receives to educate children. At the same time, the school district’s special needs population has more than doubled. And, the system confronts paralyzing debt obligations: “Fifteen percent of our state allocation right off the top goes to debt service,” according to one commission member, who, reminding us of our own arithmetic, helpfully computed: “That’s $53 million a year, so you have an inherent deficit right there, because that $1,200 per child that comes off your per-pupil allocation which doesn’t do anything to address our kids’ needs.” Because, as in most of the nation’s cities and counties, governance of the cities and counties is different than governance of the respective school systems, the challenge in Detroit is not only with regard to determining whether there ought to be just a single school oversight authority, but also how it relates to the city or county—the bodies, after all, which not only are charged with raising the revenues to finance the capital and operating budgets of the school systems, but also have to rely on the perception and performance achieved by the schools to attract families into the city—a matter of signal import for assessed property values, not to mention a city or county’s future fiscal sustainability. Thus, the Detroit coalition’s challenge to try and come up with a plan to transform a district that has been dysfunctional for more than a decade, consistently carries major debt, spends a significant part of its per-pupil funding to pay down that debt, and has graduated generations of students who are not ready for college or work is a matter of great import for Detroit’s future. Thus, unsurprisingly, Mayor Mike Duggan, who has been crystal clear he would not be involved in fixing the schools, said in an interview with the Free Press that he stands ready to “do what the group wants me to do.” Mayor Duggan has made clear, however, that even if he does not have any desire to run the school system, he does, according to a second commission member, want to appoint the governing authority. Mayor Duggan also understands – and has taken pains to explain to Coalition members—the politics, telling the members whatever final recommendations they make, he will have to sell to Governor Snyder and state legislators. As the wonderful Free Press columnist Rochelle Riley wryly wrote: “To say that this is the most important post-bankruptcy work the city will face is an understatement. Duggan’s vision and the fate of Detroit’s neighborhoods will rest with the adults who are now children in the city’s schools.”

Spinning for Municipal Bankruptcy: In the Red or Black? Atlantic City reveled yesterday when it learned that despite Gov. Chris Christie’s budget proposal to keep state municipal aid flat in the coming year, the Gov. has proposed an exception for the fiscally strapped municipality, which is slated to receive $16.2 million in municipal aid, according to figures released yesterday by the Department of Community Affairs―$3 million less than what Atlantic City received last year, when the city also received $13 million in Transitional Aid that was needed to avoid a “worst case scenario” property tax increase last March. Atlantic City will again receive about $6.3 million in total formula aid; it will also receive some $10 million in Consolidated Municipal Property Tax Relief Act aid, which is used for distressed municipalities―assistance the city did not receive last year. In addition, Chris Filiciello, Atlantic City Mayor Don Guardian’s chief of staff said the deadline to apply for more Transition Aid is March 16th: “It’s just one piece of the puzzle the mayor is trying to put together to keep property taxes as low as possible.” The state assistance news came even as continued governance uncertainty remains: yesterday, former Detroit emergency manager Kevyn Orr, previously drafted by Michigan Governor Rick Snyder to take Detroit into and then out of the nation’s largest municipal bankruptcy in history, and now tapped by Gov. Christie to determine whether Atlantic City should file for municipal bankruptcy, told Bloomberg News that it would be inappropriate for him to talk about whether Atlantic City was a “shoo-in” for bankruptcy: “You know, nothing is shoo-in. But first of all I’m not the principal on Atlantic City. Kevin Lavin is the principal. He is the emergency manager. I’m just a counselor, a consultant in Atlantic City.” However, Mr. Orr then explained that while the conditions in Detroit and Atlantic City are very different, “the underlying issue for both of them is the current state of affairs is probably not sustainable. So it does take some intervention on a receivership basis to correct that and hopefully that will happen on a consensual basis.” Mr. Orr did not explain what he might have meant in terms of any distinction between municipal bankruptcies and “receivership,” and Kevin Roberts, a spokesperson for Gov. Christie, called it “misleading” to emphasize Mr. Orr’s use of the word “receivership,” given that Mr. Orr earlier declined to say the Atlantic City was a shoo-in for bankruptcy. Moreover, Mr. Orr’s continued, unclear role vis-à-vis Atlantic City Mayor Don Guardian—and the potentially contagious credit risk to other municipalities in New Jersey due to the signal change in state policy towards distressed municipalities remained a matter of confusion clouding the city’s future sustainability.

Cloudy Forecast for Municipal Bankruptcy. House Judiciary Committee Chairman Bob Goodlatte (R-Va.) yesterday released a statement noting that “Chapter 9 of the Bankruptcy Code could provide predictability, transparency, and stability to a Puerto Rican municipal bankruptcy…It also could serve as a framework within which parties could come to the negotiating table and reach a consensual restructuring. That said, [municipal] bondholders purchased Puerto Rican bonds at a time when chapter 9 was not an option. Proposals to retroactively impact investors’ rights should be reviewed with care and caution.” Puerto Rico and its agencies have $73 billion of debt, most of which has traded at distressed levels for more than a year on concern that the island won’t be able to repay. The main electric utility is negotiating with creditors in what may become the largest municipal debt-restructuring ever. Moody’s Investors Service said in a Feb. 19 report that there’s a high probability that the commonwealth will default on its general obligations within two years. For their part, Puerto Rico officials are in favor of extending to the island the option of bankruptcy, which municipalities on the mainland already have. States do not have the ability to file for bankruptcy, and the bill wouldn’t apply to Puerto Rico’s general-obligation bonds. Melba Acosta, president of Puerto Rico’s Government Development Bank, testified that bankruptcy protection may help the island get out from under its obligations and revive the economy: “Addressing fiscal problems associated with Puerto Rico’s public corporations is not only a necessity from a public welfare and safety perspective…It is a critical piece of any strategy for long-term economic growth, fiscal sustainability and prosperity in Puerto Rico.”

Nevertheless, Chairman Goodlatte’s absence from the hearing appeared to cast doubt on whether the House would act on pending legislation to amend the U.S. Bankruptcy Code to allow government-owned corporations in Puerto Rico to reorganize through Chapter 9 municipal bankruptcy. The legislation under consideration is aimed at ameliorating this situation and providing a last resort remedy for municipalities in Puerto Rico, assuming Puerto Rico authorizes its municipalities to file for bankruptcy—making it consistent with the original purpose of Chapter 9: Chapter 9 was the last resort for municipalities that were suffering severe financial distress and, for the most part, had exhausted other available, less drastic methods of resolution. The proposed bill would amend §101(52) of the Bankruptcy Code so that it provides: “The term ‘State’ includes Puerto Rico and, except for the purpose of defining who may be a debtor under Chapter 9 of this title, includes the “District of Columbia.” Thus, the bill has a narrow, simple and straightforward purpose: to permit Puerto Rico, if it so chooses, to authorize its municipalities to file for Chapter 9. Yesterday’s witnesses testifying before the House Judiciary Committee’s subcommittee on regulatory reform, commercial and antitrust law, which has jurisdiction over bankruptcy law, mostly expressed strong support for the bill, the Puerto Rico Chapter 9 Uniformity Act of 2015, which is sponsored by Democrat Pedro Pierluisi and has bipartisan support on the island―but some major funds invested in Puerto Rico bonds oppose it. If enacted, the bill would allow issuers such as the cash-strapped Puerto Rico Electric Power Authority to formally reorganize under court supervision, something it cannot do under current federal law. Rep. Pierluisi introduced the bill last year, but it went nowhere. John Conyers (D-Mich.), of Detroit, and the full committee’s ranking member, called the current exclusion of Puerto Rico from Chapter 9 access “inexplicable,” whilst John Pottow, an attorney and professor at the University of Michigan, testified the bill is a “long overdue” technical correction which is narrowly-tailored to grant Puerto Rico the authority already given the states to determine whether and under what conditions its political subdivisions can file for federal bankruptcy. Professor Pottow said that the federal court’s decision to strike down the local Recovery Act served as “an invitation” to seek this exact remedy. Robert Donahue, a managing director at Municipal Market Analytics, told the panel that the bill poses no systemic risk and reduces the likelihood Puerto Rico will ask for outside help to meet basic needs for its citizens: “This is the best option among a limited set of unattractive options;” however, Thomas Mayer, a lawyer who represents funds managed by Franklin Municipal Bond Group and OppenheimerFunds, Inc. said the bill should be killed in favor of a receivership, because, he testified municipal bankruptcy hurts bondholders, because it is slow and unpredictable.

Citizens’ Great Stakes in Municipal Bankruptcy


February 26, 2014
Visit the project blog: The Municipal Sustainability Project

Blueprint for the Motor City’s Future. The newly retired judicial architect of Detroit’s fiscal future, Judge Steven Rhodes—honored yesterday in the Motor City along with his colleague, U.S. Chief District Court Judge Gerald Rosen and former emergency manager Kevyn Orr―noted: “The residents of the city had a great stake in the outcome of the case, a personal stake, each and every one of them…This is something that we in the bankruptcy court are totally unfamiliar with.” Judge Rhodes also cited another key element or outcome of the historic case, noting that, at his urging, Detroit’s bankruptcy reorganization spurred an agreement between city and suburban leaders to regionalize the governance of Detroit’s water and sewerage department (of which one component remains unfinished): “We have to find a way to build upon the momentum for regional cooperation …I think that is essential to the ultimate success of the city, and the region and the state.” Judge Rhodes, without his electric rhythm guitar, nevertheless made clear he was “very optimistic and enthusiastic about the city’s future: All of the ingredients for success are there. The balance sheet has been fixed.” Judge Rhodes, as well as his two colleagues, also discussed their concerns and shared thoughts about the broader topic of fiscal sustainability, with Judge Rhodes noting he remains “deeply concerned” ― in the wake of his experience in the Motor City approving reductions in pensions and health insurance for more than 32,000 Detroit retirees ― about the unfunded pension liabilities of other cities, suggesting Detroit and other cities need to consider moving away from costly pension plans and transition employees towards 401(k)-style defined contribution retirement plans. Judge Rhodes cited publicized estimates that cities and counties have unfunded pension liabilities ranging between $1 trillion and $4 trillion: “It flies largely under the radar and it doesn’t get a lot of attention and it doesn’t get a lot of management, and I’m deeply concerned about that…Because that’s money cities don’t have that they have promised to their retirees, and I think that solution across the country, and including in Detroit, has to be at some point defined contribution (plans).” The retired bankruptcy judge’s remarks, which drew protests outside the event, reflected on the Motor City’s federally approved plan of debt adjustment, under which non-uniform retirees will receive reductions of a minimum of 4.5 percent, while police officers and firefighters realized reduced COLAs―with the reduced benefits scheduled to begin showing up in retirees’ pension checks in March. The plan of adjustment does retain a hybrid pension plan under which new employees contribute more to their retirement.

Judge Rhodes suggested Detroit missed a chance to exit the traditional defined benefit pension business altogether—a reflection with which Mr. Orr did not concur. Mr. Orr, asked whether it was a missed opportunity for the city, said: “I don’t think so…Our general services pensions are modest, $19,400 (per person) on average.” (Police and firefighters receive pensions that average about $25,000 a year, but they are not eligible to collect Social Security like other retirees.) Under its plan of adjustment, as approved by the federal bankruptcy court, Detroit was able to reduce its $3.13 billion unfunded pension liability by 54 percent to $1.45 billion through reduced benefits and the 20-year “grand bargain” infusion of $816 million in contributions from state taxpayers, private foundations, and donors of the Detroit Institute of Arts donors. The approved plan provided for significantly greater savings through its profound cuts in promised retiree health insurance benefits―from $4.3 billion to $450 million.

Taking Final Stock in Stockton. “We have spent the last several weeks finalizing dozens of complicated legal and real estate documents and making preparations for thousands of checks that must be issued for the effective date…The stigma of bankruptcy is lifted and we can move our city forward toward recovery,” Stockton City Manager Kurt Wilson said yesterday, as the California city formally exited municipal bankruptcy—nearly one thousand days after filing for federal bankruptcy protection in July of 2012. Stockton’s route to exiting municipal was profoundly different than Detroit’s, as there was no state takeover; rather the elected leaders, as in Jefferson County, Alabama’s municipal bankruptcy, remained in charge and accountable to the citizens throughout the process—and, as in Alabama—despite, rather than with any assistance—such as was provided to Detroit and Central Falls from their respective states. U.S. Bankruptcy Judge Christopher Klein had lifted the stay preventing Stockton from exiting bankruptcy last month on January 20th, saying during a hearing that Franklin Templeton was not likely to win on its appeal of his decision. Manager Wilson said Stockton has developed a long-range financial plan for the duration of the agreements in its approved plan of debt adjustment, some of which extend out to as far as 2053. Thus, today marks a successful $2 billion municipal financial restructuring. Mr. Wilson and the city’s legal team will be in Judge Klein’s courtroom today for what is expected to be a routine conference updating the status of Stockton’s case, noting that the work in the city over the past three weeks to put the city’s plan of debt adjustment approved by Judge Klein into effect has been “heroic,” adding it has involved dozens of people, “not only people working on behalf of the city, but also people working on behalf of creditors. These are incredibly complicated transactions, and we were doing all of them and trying to get them completed on the same day.” Mr. Wilson said Stockton gave top priority to the 1,100 retirees who gave up some $544 million in lifetime medical benefits as their part or contribution in helping Stockton put together its plan of debt adjustment—with the final agreement providing the retirees a $5.1 million payout instead. Checks were mailed to retirees at the beginning of the week, with Mr. Wilson noting: “We’ve heard very clearly from some retirees that every day of delay has been a hardship…We made those a priority over everything else. They are ahead of everybody else.” Nevertheless, the city’s long municipal bankruptcy still will have another chapter: Franklin Templeton, the financial behemoth which had lent Stockton $36 million for a variety of projects in 2009, but which will receive only $4 million under the city’s approved plan of debt adjustment, is appealing Judge Klein’s decision to the 9th U.S. Circuit Court of Appeals—albeit, the appeal will not affect Stockton’s implementation of its restructuring plan. Mr. Wilson did note that few will discern any bright line etched in the sand of the precise moment in time when Stockton becomes a formerly bankrupt city; nevertheless, he remarked, it is a significant milestone: “We understand we’ll be under the microscope for every financial transaction we make for the next few decades…You’d be hard-pressed to find another city that has a handle on its finances going forward the way we do.” He added that it will be incumbent upon the city to make difficult spending choices going forward, even to deny increasing expenditures on universally popular services if those financial outlays do not fall within Stockton’s long-range economic projections: “In the past, the city sometimes made financial decisions based upon how worthy a cause was…The city used to make decisions where if something was worthy, just do it. We’re no longer in a position to just do it…We have to either make it fit into our model or reduce some other expenditure to get there. That will be difficult for people who say, ‘Hey, we’re out of bankruptcy.’ The reality is, where we were before bankruptcy was an unstable place.”

Hard Choices. San Bernardino, unlike Detroit, has no state-appointed emergency manager to make hard choices about the city’s difficult road to bankruptcy recovery—nor can it count on any assistance from the state. Nevertheless, it does appear that City Manager Allen Parker’s team might have the fiscally stressed city on the verge of a significant turnaround―a turnaround that marks a signal change in fiscal direction critical to the city’s hopes of completing and submitting its plan of debt adjustment to the federal bankruptcy court in three months—and to the city’s future sustainability. As Mr. Parker notes: “We stopped the bleeding…Revenue just exceeded — just by a bit — what we projected, and we were able to contain costs, so we’re on schedule to finish the year in the black.” Thus, the San Bernardino City Council has unanimously approved adjustments to the city’s budget—adjustments which are projected to actually provide for a small surplus, in part made possible by the politically difficult choice to shut three of the city’s five pools to the public this summer. However, as Assistant City Manager Nita McKay notes, even with the hard choices, the city’s successful efforts to balance its budget is different than in a normal, municipal budget process, because it relies upon the city’s chapter 9 filing as a key protection to prevent creditors from suing the city for money owed to them: “It is important to note that the city’s balanced General Fund budget for the fiscal year is made possible because the city is under the protection umbrella of Chapter 9 bankruptcy.” Moreover, City Manager Allen Parker warned there is as much as $15 million the city “hasn’t figured out how to pay yet.” With the ever-approaching May 30th deadline for the city to file its plan of debt adjustment with U.S. Bankruptcy Judge Meredith Jury, the city reports its sales and use tax revenue is expected to continue to climb to the highest level since 2006-07, which, along with property tax and administrative civil penalty revenue increases, are projected to provide the city $1.3 million toward $2.8 million in expenditure increases—leaving a surplus of about $113,000, with no reserves, according to budget documents. San Bernardino lists $5.2 million in “salary savings,” or money budgeted for positions that are now vacant. It is now trying to fill some of those positions, particularly police and firefighters, Ms. McKay said. Nevertheless, San Bernardino confronts significant budget burdens, including some $2 million for increased firefighter overtime, unanticipated, because, according to Mr. Parker, there was a three month delay before cuts to the Fire Department that were supposed to take effect last July 1st actually became effective. The city also approved general fund increases of $600,000 for 36 new police vehicles, $190,000 in part-time hours for the Parks and Recreation Department, $25,000 for Code Enforcement and $12,000 for the city treasurer’s office. The Council rejected, 4-3, a motion to add $60,000 to keep the other three pools open—notwithstanding a councilmember’s argument that these pools are the type of quality-of-life issues residents depend on a city for and that attract businesses, with Councilmember Valdivia noting the affected pools would be in minority areas. But, in rejecting the motion and noting the chapter 9 hanging over their heads, Councilman Fred Shorett responded that while a good argument could be made to keep pools open, and to reverse any of a number of cuts to “sacred cows” the city has made during bankruptcy; San Bernardino needed to put money toward paying deferred costs and emerging successfully from bankruptcy, adding: “I can balance my budget, too, if I don’t pay my cable bill or my gas bill or my electric bill.” In a sobering note, Councilmember Valdivia had requested staff to provide his colleagues with a summary of the municipal bankruptcy costs the city has accumulated since it filed for federal protection nearly three years ago: more than $9.3 million. Without those bankruptcy-related services, the city would have to pay significantly more than $9 million as creditors came after it, said Parker and City Attorney Gary Saenz.

Municipal Blueprints for Fiscally Sustainable Futures

February 24, 2014
Visit the project blog: The Municipal Sustainability Project

Blueprint for the Motor City’s Future. Detroit Mayor Mike Duggan will submit his proposed budget to the Detroit City Council today—some two months earlier than usual, because the Motor City’s post-bankruptcy budget approval process is more rigorous. Nevertheless, few expect the city’s first post-bankruptcy budget to stray far from the $1.1-billion spending plan included in a three-year budget emergency manager Kevyn Orr cobbled together last year. Nevertheless, there will be a fundamental change: the Mayor’s budget not only must be approved by the Council, but also by the Michigan Financial Review Commission—a key provision in the adoption of the so-called “Grand Bargain” which not only became the fulcrum for the city’s plan of debt adjustment, but also created a signal change in the state-Detroit relationship, making the new state oversight commission ultimately responsible for approving the city’s budget. That means that the city’s first post-bankruptcy budget must be submitted 100 days before the next fiscal year, which is now March 23rd―a signal change from prior years when Detroit, like most cities across the country, simply had to adopt its budget before the new fiscal year, which used to be July 1. Nevertheless, City Council President Pro Tem George Cushingberry Jr. does not anticipate the new, state level of review will create too much of a burden, noting: “We’ll all be on the same wavelength overall,” albeit, that is somewhat of an understatement, because, as Councilwoman Raquel Castaneda-Lopez puts it: “We’re restricted by the plan of adjustment,” the blueprint U.S. Bankruptcy Judge Steven Rhodes approved to give Detroit federal blessing to exit from municipal bankruptcy. Moreover, yesterday, Detroit CFO John Hill reported at the monthly meeting of the new Financial Review Commission that Detroit’s adjusted revenues are coming in close to targets. According to the Motor City budget adopted last year, Detroit’s departmental expenditures for the 2015-16 fiscal year are estimated to include $315 million for police, $143 million for the fire department, $10 million for the mayor’s office, and $7 million for the city council. On the revenue front, the city expects to be over anticipated revenues, notwithstanding lowered assessed values on homes in many neighborhoods citywide from 5% to 20% this year. With those reduced assessments, Detroit had anticipated receipt this year of $102 million in property tax revenues; however, CFO Hill advised the Mayor and Council that greater taxpayer confidence that the city has addressed demonstrated concerns about the integrity of its assessment process has resulted in a signal bonus: because homeowners appear to feel that their properties are more accurately valued, more are paying their taxes, and the city now expects it will receive a minimum of $114 million. Mr. Hill advised the Council that he is now projecting property taxes will reap some $254 million, $10 million less than was projected in the city’s plan of debt adjustment or exit plan—a shortfall to which Mr. Hill attributed a number of causes, including a higher number of workers in the city being paid on contract, rather than as employees―meaning their municipal income taxes are not withheld.

Fixing Cities’ Income Leaks. Detroit Mayor Mike Duggan yesterday reported he is working with Michigan state legislators and Gov. Rick Snyder, as well as mayors of more than 20 cities around the state, on a critical issue: collecting municipal income taxes. Detroit, which has the broadest tax base of any city in the nation, has income taxes as its largest single source of revenue—about 21 percent; yet it suffers from a singular problem: non-collection—especially with regard to commuters—both with regard to those coming into the city, but also residents who commute out of the city. These non-collections have meant a shortfall of as much as 50 percent of what was owed. Thus, Mayor Duggan is focusing on changes in state law to force suburban companies to withhold income taxes on residents of cities that levy income taxes. In addition, the Mayor reported there are discussions about how to collect income taxes on Detroit residents who live in the city, but claim suburban addresses, in many cases to avoid paying auto insurance rates that Mayor Duggan says average about $3,600 a year per household, generally double what is charged the average suburban driver.

Making the Fiscal Grade? Even as the Motor City is moving forward towards solvency and fiscal sustainability, there are harder questions with regard to its public schools, whose debt burden is considered key to the district’s revival and survival—and, of course, to Detroit’s future. Thus, the Coalition for the Future of Detroit Schoolchildren, a group which is crafting recommendations for Michigan Gov. Rick Snyder on options to reconstruct the system’s fiscal foundations has made clear that one option might be municipal bankruptcy. The Coalition is seeking to put together formal recommendations to submit to Gov. Rick Snyder by April Fool’s Day—an ambitious effort which likely will be as critical to Detroit’s fiscal future as the school system’s. The Detroit Public School System (DPS) currently faces an annual debt service total of around $56 million a year―the equivalent of about $1,200 per student—an unsustainable level. In an interview with the Detroit News last week, one of Gov. Snyder’s advisors said one possible legislative proposal would be for the state to authorize the creation of a new debt-free district for DPS―with the debt being serviced by an outstanding levy until it matured; nevertheless, the advisor, John Walsh, told the News that the Governor had been adamant about ruling out municipal bankruptcy as an option—an option, in any event—which may not be pursued under Michigan’s law absent the governor’s approval. Currently, DPS carries roughly $2.1 billion in debt, of which some $1.6 billion are in unlimited-tax general obligation bonds, secured by Michigan’s School Bond Qualification and Loan Program, with another $325 million by long-term state aid revenue bonds, secured by an intercept feature on state aid; and $108 million is in the form of loans from the Michigan School Loan Revolving Fund, according to Moody’s.

A Bridge Not Too Far. The U.S. Supreme Court yesterday, without comment, said it will not review a June appeals court decision concerning a new Detroit-Windsor bridge, removing another hurdle to the publicly financed span’s scheduled completion in five years—effectively allowing to stand a U.S. Sixth Circuit Court of Appeals ruling which upheld the Federal Highway Administration’s approval of the Delray neighborhood in Detroit as the preferred location for the U.S. side of a new bridge crossing to Canada. Opponents of the bridge claimed the FHWA had violated the National Environmental Protection Act, Administrative Procedures Act, principles of environmental justice, and other federal laws. U.S. District Judge Avern Cohn in 2012 had dismissed the lawsuit by the Latin Americans for Social and Economic Development, Citizens with Challenges, Detroit Association of Black Organizations, and other community groups — along with the Detroit International Bridge Co., which owns the privately held Ambassador Bridge and wants to build one next to it. Yesterday’s decision comes five days after Canada and the U.S. reached an agreement in which Canada will put up the hundreds of thousands of dollars to build a U.S. Customs plaza at the New International Trade Crossing and be repaid through tolls. The $2.1 billion bridge is to be two miles from the Ambassador Bridge and could open as early as 2020—it is expected to handle as much as one third of all U.S.-Canadian trade. Last June, the U.S. Coast Guard had issued a required permit for a publicly owned bridge from Detroit to Canada — clearing another key hurdle in the high-profile project.

Tense Futures & Pasts. San Bernardino City Manager Allen Parker thinks things might be looking up, reporting that, at mid-year, San Bernardino might well be on the verge of a significant turnaround: it has reached the middle of its fiscal year with a balanced budget. While that might not seem a cause for celebration for most cities, it appears to signal a change in fiscal direction fundamental to this city’s future sustainability. Mayhap equally importantly, it appears to signify that the municipality has avoided backsliding as the costs of putting together its plan of adjustment to halt the fiscal bleeding and other unexpected costs have imposed extraordinary challenges the its precarious margin for budget balance to its current fiscal year budget. Mayhap Mr. Parker puts its most aptly: “We stopped the bleeding…Revenue just exceeded — just by a bit — what we projected, and we were able to contain costs, so we’re on schedule to finish the year in the black.” That is a marked change from a year ago—a time when the city seemed to be on the down fiscal escalator, with its then midyear budget review demonstrating the city’s budget was balanced only by omitting $22.9 million in deferred payments. In contrast, now the city appears to have cleaned its balance sheet with regard to its California Public Employees’ Retirement System (CalPERS) obligations, and, perhaps of greater significance there is, as Manager Parker puts it: “[N]othing hidden in (the budget).” That is not to write that the future path to fiscal solvency and a painless exit from municipal bankruptcy will be easy: Mr. Parker happily reports that “The 12 months (of fiscal year 2014-15) have been solved,” but “[T]he Plan of Adjustment has other difficulties.” The rocky fiscal road ahead will require a fiscal plan to come up with nearly $200 million in needed infrastructure improvements, funds to meet expected increases to CalPERS payments, and more. Thus the Council convened a public review of the full fiscal year budget last evening to invite public input and comment—especially with regard to four changes: to approve increases in estimated revenues in the amount of $1.3 million in the General Fund; to approve increases in appropriations in the amount of $1.3 million in the General Fund; to approve budget transfers in appropriations in the amount of $1.46 million; and to approve increases in appropriations in the amount of $593,936 in the Traffic Safety Fund for the purchase of police vehicles. Longer term—in our dawning age of shared services, Mr. Parker reports the city is actively looking at outsourcing services—a challenge that has proven hard for the city in past attempts—but one, especially in the face of fire overtime costs—that will be defining for its fiscal future.