06.24.14

What Are Essential Services?Even though the bankrupt City of San Bernardino has reached a tentative agreement with CalPERS in federally supervised mediation, it faces hard choices about deciding which municipal services are essential—or what would define essential services insolvency, as well as other pension related challenges. Last night, as the Mayor and Council began debating the adoption of a balanced budget for the new fiscal year, that question was front and central—with the city convinced that to exit bankruptcy, it must terminate a union contract that pays an average annual salary of $190,000 to each of its top 40 firefighters, but uncertain whether it can continue to provide public libraries. The tentative, mediated resolution with CalPERS with regard to the $143 million the city owes—could pave the way for the city not only to survive, but also to have the pending appeal on the constitutional issue of that debt in the 9th U.S. Circuit Court of Appeals dropped—but now the city will have less than three weeks to determine whether to seek to use the federal municipal bankruptcy law in its trial in the U.S. Bankruptcy court before Judge Meredith Jury next month to cancel current firefighter and police contracts if current negotiations do not succeed. (Judge Jury released the firefighters union from mediation last week after the union’s attorneys claimed the confidential nature of the meditation was preventing them from protecting employees in ongoing city budget negotiations, according to a court filing.) The respective unions are the last major creditors with whom the city has yet to reach an agreement—or, as the firefighters’ attorney noted to Judge Jury: “We are different from every other creditor in the room,” charging that the city is conspiring to close the fire department and contract out with another agency for the service, planning “to go after our pay and benefits and possibly the fire department itself.” The city’s financial advisor testified in the federal bankruptcy court that in its review of the top 120 firefighters, the average pay for the top 40 was $190,000 annually, the next 40 averaged $166,000, and the next 40, $130,000—with those salaries protected by a voter-approved city charter amendment that was adopted several years ago under the amendment which restricts how the city can negotiate union workers’ pay. One option, the financial advisor noted to the court, was for the city to ask voters to remove the amendment in November—an option, Judge Jury noted, which could be an “important” step in the bankruptcy. Meanwhile, parallel discussions with the police force could, according to testimony by the union’s attorney, reach resolution within three weeks—with the firefighters having already concluded that no voluntary agreement is possible. With the city’s fate on these issues in the hands of a federal judge, it began last night to debate choices with regard to what defines essential public or municipal services—such as San Bernardino’s public libraries, which, at least so far, have been spared painful cuts that would have meant shuttering these threatened community assets for the foreseeable future. The question—itself dependent on the larger outcomes of the city’s bankruptcy trial next month—come down to more nitty-gritty issues, such as: whether to provide enough funding to keep the city’s three branch libraries open, though at reduced hours.

  • Pension-related issues. With a tentative agreement between San Bernardino and CalPERS, the issue of some $50 million in pension obligation bonds now moves to the forefront: San Bernardino has not made payments on its pension obligation bonds since it filed for municipal bankruptcy protection a year ago last August, leading the unions to charge in federal bankruptcy court that San Bernardino has withheld as much as $75 million it owes, albeit City Attorney Gary Saenz has made clear in a prepared statement that such a claim “is incorrect,” noting that the bulk of the $75 million in question represents the stated balance of invested “restricted fund accounts,” or special revenue funds and restricted funds that are used to track monies that are legally designated for a specific purpose and cannot be used for other activities: “Pursuant to our city charter, these funds cannot be reallocated for any other general purpose item, including the fire department.” According to San Bernardino’s 2010 audited financial report, its most recent, the city said it had $223 million of outstanding debt at the end of June 2010, of which $131 million was for tax allocation bonds. The city also had $48 million of pension obligation bonds, $12.5 million of revenue bonds and $31 million of certificates of participation. The pension obligation bond creditors, which include Ambac, Assurance Co., Erste Europaische Pfandbrief-und Kommunalkreditbank AG, and Wells Fargo NA, supported the California city’s efforts to seek bankruptcy protection at a hearing before Judge Jury last August, but have been below the radar since. The most recent filing with the federal court by pension obligation bond creditors was last July: urging the court to grant summary judgment in favor of the city on Chapter 9 eligibility; to overrule in their entirety the objections to eligibility filed by the San Bernardino Public Employees Association, CalPERS, and other creditors; and enter an order of relief. The Bond Buyer reports that scheduled interest payments of $1.01 million each on San Bernardino’s pension obligation bonds went unpaid on Oct. 1, 2012, April 1, 2013, and Oct. 1, 2013.
  • What are essential services? The city council began consideration of the budget last night—including $10.6 million in payments to creditors; however, the budget documents that were available did not have a break down on which creditors would be paid what amounts. But one item on the budget was whether to cut $1 million from the Library’s $1.7 million budget — a cut so deep it would have meant closing all but the Feldheym Central Library and laying off 10 employees―San Bernardino has reduced its support for public libraries to $8.07 per resident as compared to the Golden State average of $31.35 per resident. Imagine the prospects of trying to adopt an annual budget where major decisions in a federal court could preempt any hard decisions and where the costs associated with its bankruptcy filing, negotiations, and trial costs have gravely interfered with ongoing struggles to raise revenues to match spending on necessary services such as police, fire, road maintenance and trash collection. The challenge for the Mayor and council is how to weigh the impacts of cuts on the community. Are libraries—or playgrounds–“nonessential” services? How do those services rank for families – ergo assessed property values – in terms of whether a family wishes to move to―or from―a city?

Motor City Pensions & Bargains.  Like FGIC, Motor City holdout creditor Syncora Guarantee Inc. shows no signs of reaching an agreement—yesterday accusing the Motor City of pitting its retirees against its financial creditors—this coming in the wake of the firm’s request that the city provide it with financial information about its retirees—a request which Detroit, with support from Michigan Attorney General Bill Scheutte, opposed, claiming the “billion-dollar insurance company” is trying to harasses its retirees—and requesting a protective order. Syncora has much at risk: the firm insures Detroit interest-rate swaps that hedge some $800 million of $1.4 billion of pension certificates of participation (COPs), as well as roughly $300 million of the COPs themselves—COPs which the Motor City has sued to invalidate.  The city and holdout creditor have reached agreement on 49 out of 50 outstanding differences, but the latest request, the city argued in its filing, was “beyond the pale: The only possible explanation for this outrageous request is that Syncora is attempting to gain a litigation advantage by harassing, oppressing and embarrassing the city and its retirees.” Syncora, for its part, claims it is seeking the information in order to determine what information the city relied on to, as its filing notes: “discriminate in favor of the retirees,” seeking a court order to mandate that the city provide the location and financial position of the retirees. At heart, the firm is seeking to test the issue of what would be fair and equitable in terms of the haircuts each of the tens of thousands of Motor creditors might receive in the city’s final, approved plan of adjustment—or, as Syncora put it: “The personal hardship that retirees or bondholders will suffer is not a cognizable basis under the bankruptcy code to discriminate between them,” an approach, the firm noted, which could lead to a “dizzying array of mini-trials” to decide which creditors would suffer the most.

Chocolateville. Moody’s has recognized the good news and continuing fiscal recovery of Central Falls, Rhode Island—the small city of one square mile and 18,000, which exited from municipal bankruptcy nearly two years ago, raising the small city’s credit rating, a lift that will benefit its borrowing costs on some $8.7 million in general obligation debt—even as the former industrial city’s GO rating remains at junk level, noting: “The upgrade to Ba3 reflects the city’s recent trend of favorable operating results.” Rhode Island transitioned the city back to local control a year ago last April. In its upgrade, Moody’s noted that the city still faces significant challenges stemming from high fixed costs and years of deferred capital expenditures and projected weakness in revenue growth, including the loss of an annual Impact Fee payment and back taxes owed from the Wyatt Detention Center.  Nevertheless, Mayor James Diossa noted: “It’s nice to know that the people in New York are confident that we’re doing better.”

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