This morning’s eBlog, largely excerpted from this morning’s eNews to follow, looks at four bankruptcy cases affecting hundreds of municipalities―three chapter 9’s, and one chapter 11. I should point out that in the near-decade long effort to restore chapter 9 in the federal code, I do not recollect a single municipal elected official who evinced enthusiasm about supporting this legislation; most felt that filing for municipal bankruptcy would constitute a failure of leadership. Indeed, I vividly recall a representative of a national organization testifying before the Maryland legislature recently in opposition to state enabling legislation to permit a city or county in the Terrapin state to file for federal bankruptcy protection. It is, after all, a step in which an elected leader’s role is significantly suspended for the duration. It is, however, often the only option available to ensure the provision of essential, lifesaving services that are only provided in America by cities, towns, and counties.
By some strange formation of the stars, three significant municipal bankruptcies geographically spread across the country are coming to a head―even as a fourth potential corporate bankruptcy, which could critically affect emergency 911 services in hundreds of cities and towns, is lurking. The decision to excerpt these four is to try to help readers understand not just the extraordinary complexity of the municipal bankruptcy process, but also how many other municipalities are affected among the tens of thousands of creditors involved in these chapter 9 cases.
Juggling Chapter 9 Schedules. This has been a week of municipal bankruptcy schedule setting, with federal judges in Detroit and Jefferson County trying to reach consensus on schedules for the respective municipalities to exit bankruptcy, and then yesterday California U.S. Bankruptcy Judge Meredith Jury, presiding over San Bernardino’s chapter 9 petition, announced that next week she will appoint U.S. Bankruptcy Judge Gregg Zive of Nevada as mediator—and will issue an order explaining what issues the judge will be mediating. San Bernardino and its creditors agreed on Judge Zive as a mediator, notwithstanding the city’s position that no mediator should be appointed unless and until a decision has been made regarding the city’s eligibility to be in chapter 9 bankruptcy—Judge Jury had previously scheduled a hearing for later this month for summary judgment on eligibility, a position opposed by CalPERS and a city employee union. These two opponents have until today to file papers in opposition to the city’s eligibility to be in chapter 9 municipal bankruptcy; other creditors, Ambac Assurance Co., Erste Europäische Pfandbrief-und Kommunalkreditbank AG and Wells Fargo NA, have already filed a joint document in support of the city’s eligibility for bankruptcy. The threesome, who call themselves, not the three musketeers, but rather the POB (Pension Obligation Bond) creditors, recommended the court grant summary judgment in favor of the city on Chapter 9 eligibility; overrule in their entirety the objections to eligibility filed by the SBPEA, CalPERS, and other creditors; and enter an order of relief. Their joint interests—and stake—relate to their respective roles with respect to San Bernardino’s issuance of $50.4 million in taxable pension obligation bonds to refund the city’s obligations to CalPERS relating to municipal employees’ pension benefits. San Bernardino has missed approximately $13 million in payments to the pension fund. San Bernardino’s retirees’ attorneys have urged there should be a retirees’ committee similar to what has been done in the Detroit Chapter 9 bankruptcy case; however, San Bernardino City Attorney James Penman argued in a court filing that the city cannot afford the cost, noting: Detroit “has proposed dramatic reductions to retiree health care benefits and an official retiree committee may make sense for Detroit….Unlike the City of Detroit, San Bernardino has not proposed any such cuts to the health care benefits of its retirees.” Moreover, San Bernardino argued that with revenues of $1.2 billion, Detroit is more fiscally capable of financing the cost of an official retiree committee. In contrast, San Bernardino, with about 200,000 residents, does not have that kind of financial resources.
Motown & Jeffco. Almost like bookends, Jefferson County’s bankruptcy schedule and Detroit’s tentative schedule put San Bernardino’s in the middle. What all three cases demonstrate is not only the enormous amount of time and resources required to complete this plan of adjustment refereed by a federal bankruptcy court, but also how this process tends to affect neighboring municipalities. Sometimes we forgot how interconnected municipalities are in a metropolitan area. Thus, in Jefferson County, the City of Birmingham has significant fiscal stakes in the final agreement, and so too in Motown—with some 100,000 creditors scrambling over the long period of adjudication in the U.S. Bankruptcy court, neighboring jurisdictions will be affected. These intergovernmental conflicts strain the ability to impose rigid or aggressive timetables for exiting Chapter 9 bankruptcy, and each municipality understands that every day consumed in federal court keeps an expensive meter running. In the Jefferson County case, a local water board, a city, assorted elected officials, and others who oppose a proposed wastewater sewer rate increase critical to the proposed exit plan, have filed objections. The county will be asking U.S. Bankruptcy Court Judge Thomas Bennett next Tuesday to approve the county’s 822-page disclosure statement detailing facts about the county’s fiscal condition and its plan of adjustment, which hinges on refinancing $1.9 billion of sewer warrants.
But Judge Bennett will also lend an ear to arguments from objectors. (Jefferson County filed for bankruptcy in November 2011 citing $4.2 billion of warrants — $3.1 billion attributed to the insolvent sewer system.) The county, in a revised disclosure statement filed Monday, wrote that “the compromises and settlements embodied by the plan [of adjustment] resolve many highly complex and uncertain issues that could take years and millions of dollars to litigate to finality….The comprehensive and final resolution of these issues under the plan provides for a fair and equitable result and greater distributions to the county’s creditors, and offers the county and its sewer system a ‘fresh start’ from a history plagued by actual and potential litigations.” In its proposed exit plan, Jefferson County proposes to make creditors holding general obligation, school and lease warrants whole for principal, while making adjustments to indentures, redemption schedules, or, in the case of the lease warrants, extending the maturity schedule. In some cases, higher penalty interest rates that were imposed on variable-rate debt may not be paid. The key to successful exit involves the county’s plan to restructure $3.2 billion of debt on its sewer system, much of which consists of failed variable-rate demand and auction-rate warrants—a part of the proposed plan achieved through agreement with creditors of the county’s sewer system through which the county projects achieving more than $1.3 billion of concessions, which would reduce the sewer system’s indebtedness to approximately $1.9 billion. But in comments filed by the City of Bessemer and Birmingham’s Water Works Board (Birmingham had earlier filed suit against its surrounding Jefferson County over the proposed closure of hospital services.), the two objected that Jefferson County’s disclosure statement fails to adequately address “financial information, data, valuations or projections” and risks that are relevant to creditors’ decisions whether to accept or reject the proposed plan—the Water Works Board provides billing for 113,000 of the county’s sewer customers while Bessemer, a municipality in Jefferson County, also provides billing for 19,258 sewer customers. The two objectors assert they are “parties in interest” because of their “pecuniary and practical interest in the long-term viability of the [county’s] plan.” The Water Works Board and Bessemer also said that a proposed plan for refinancing sewer warrants later this year initially decreases outstanding debt to $1.9 billion or $13,000 per sewer system customer, but would then grow to a peak of $2.55 billion or $17,000 per customer because of the way the financing is structured. Under Jeffco’s proposed plan, official sewer system creditors, including those who are not parties to the county’s negotiated agreements approving the debt restructuring, would realize a return on their investments of between 65% and 80%. Creditors who choose to pursue insurance claims would receive 65 cents on the dollar, while those who forego insurance would be guaranteed 80 cents on the dollar. In order for the sewer system debt restructuring to occur, the county proposes to issue $1.9 billion of warrants soon after confirmation of the bankruptcy plan. Outside of the courtroom objections to Jefferson County’s proposed exit plan, churches and community organizations are planning their own meetings to organize protests over the planned rate increases. Today is the deadline for filing objections to the county’s revised disclosure statement and plan. If Judge Bennett approves the plan and voting procedures next week, ballots will be sent to all of the county’s creditors. The county already has agreements from major creditors holding the sewer, school, lease, and GO warrants who have agreed to vote for the plan. Ballots must be returned by Oct. 7. A hearing confirming the plan is tentatively scheduled for November 12th, and Jefferson County is planning to officially exit Chapter 9 bankruptcy by New Year’s Eve.
A Different Kind of Municipal Bankruptcy. The Wall Street Journal yesterday reported that the nation’s largest ambulance operator serving smaller cities and towns is preparing for a possible chapter 11 bankruptcy filing. The company, Rural/Metro, operates in 21 states and nearly 700 communities, including contracts secured over the last 18 months in Knox County, Tenn., Town of Carefree, Ariz., and Cass County, Ind., according to its website. The company, like many cities and towns, has been struggling with declining revenue from ambulance trips. Also, like some distressed cities, the business bears a heavy debt load from a 2011 leveraged buyout, so much so that last month it missed a $15.6 million interest payment, which sets off a 30-day grace period to negotiate before a default. The company’s EMS professionals provide more than 1.5 million 911 emergency and hospital-to-hospital transports annually; its firefighters respond to more than 63,000 calls for assistance each year. Thus, unlike a municipal bankruptcy, which is structured specifically to ensure the provision of such essential services, a corporate bankruptcy could well eliminate critical, lifesaving services to hundreds of municipalities. The company, which was founded in 1948 as a four-man fire department to serve a community that lacked one, expanded into ambulance service in the 1980s and 1990s through acquisitions, and today, according to its website, employs more than 10,000 people nationally. Warburg Pincus LLC took over the national ambulance and firefighting-service operator in 2011, putting in $213 million of its own money and paying for the rest with $515 million of debt, according to Moody’s. In the wake of the takeover, Rural/Metro has been trapped between a rock and a hard place: it has experienced higher debt costs and declining revenues. The company has also recognized a real world issue that confronts state and local leaders: ambulance operators cannot deny emergency transport to uninsured patients. Therefore, even as the economy and record unemployment has increased the number of uncompensated responses, insurers have become stingier about making payments. Rural/Metro is reported to be negotiating with creditors, so it could stave off corporate bankruptcy and receive another grace period on its missed interest payment if discussions are progressing well, and it is discussing with Credit Suisse Group AG a potential “debtor-in-possession” loan that would help it continue operating while under bankruptcy protection. But, unlike in a municipal bankruptcy, if these efforts fail, Rural/Metro could be faced with handing over the keys to those emergency response vehicles to a U.S. bankruptcy court. That, unlike a chapter 9 municipal bankruptcy, could leave a lot of cities, counties, and towns in the lurch.
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