06.25.14

Deferring Hard Choices. San Bernardino Mayor Cary Davis and the city council voted to defer acting on next year’s budget until next Monday—the last day of the fiscal year, after a majority of the council expressed unease with a plan to cut the code enforcement division in half, as proposed by City Manager Allen Parker. The proposed cuts, which Police Chief Jarrod Burguan and Community Development Director Mark Persico—who indicated they had come up with the proposed cuts just two hours before the session began, called for reducing the division from 24 positions to 12—with half the cuts coming from Police Department’s responsibilities to enforce the city’s crime-free multi-family housing, medical marijuana dispensaries, and a strategic focus on certain neighborhoods.  The last minute proposal appeared to take most council members by surprise, and they expressed apprehension that – coming on top of cuts already proposed cuts for the Fire Department – the additional cuts could adversely affect quality of life and the ability to attract businesses critical to the city’s efforts to realize increased tax revenues and economic opportunities. In addition, Code enforcement supervisor Robert Houts warned members that adoption of the proposal would lower revenues, advising that data from the Finance Department actually shows that in 2013-14 code activity brought in more than $1.8 million. Combined with the Independence Day holiday, the temporary setback means the city will have to adopt a new budget in less than a week—or pass a continuing resolution that approves each department to spend one-twelfth of the fiscal 2014-15 budget, giving the city an additional 30 days to formalize the budget—but the latter option, as the city’s Deputy Attorney warned, could hurt the city in federal bankruptcy court, because creditors could question the city’s progress—and commitment—to implement its plan of adjustment if and when it is approved by U.S. Bankruptcy Judge Meredith Jury. Moreover, the attorney warned: “Your creditors will use that against you.”

The city just completed its 2011-12 CAFR and Mike Busch, president of Urban Futures and the city’s financial advisor in the bankruptcy, said in an emailed response that city officials hope to be caught up on audited financial statements by fourth quarter 2014. The final budget, in fact, is expected to $10.6 million in payments to creditors, according to Michael McKinney, chief of staff for Mayor Cary Davis—the city’s largest creditors from its bankruptcy include: bondholders, fire and police unions, and CalPERS. As of June 30, 2012, the city had bonded debt outstanding of $81 million and additional debt of $116.1 million, according to the 2011 audited financial report, its most recent, with the bonded indebtedness including $46.1 million of pension obligation bonds and $25.1 million certificates of appreciation. Nevertheless, the city’s CAFR demonstrates remarkable progress: its long-term liabilities decreased by $174.2 million or 46.4%, including a decrease in long-term debt of $120.2 million, or 56%, during the fiscal year as a result of the Economic Development Agency dissolution and the transfer of related tax allocation bonds of $130 million to the successor agency.

Like other California local governments, the state’s dissolution of redevelopment districts had a signal, adverse impact—contributing to the city’s fiscal emergency. San Bernardino, last September, filed suit against the state in an effort to use its ongoing bankruptcy case to win the redevelopment dispute with the state. That case, which is still pending, is a complex federalism issue—involving not just the three levels of government, but also different kinds of federal courts. Indeed, earlier this month, the state received a favorable ruling from U.S. District Court Judge James Otero, who held that Judge Jury had erred in denying the state’s Eleventh Amendment sovereign immunity arguments and remanded the case for further proceedings. San Bernardino was attempting to make the redevelopment agency part of its bankruptcy. (U.S. Bankruptcy Judge Meredith Jury had ruled on Sept. 11, 2013 that the city and the successor agency to its redevelopment agency are separate entities, making it a non-bankruptcy court issue. She also left the door open for the city to refile on the issue.) It was Judge Jury’s ruling on the second filing that Judge Otero reversed, finding that that the city and successor agency are two separate entities, which means the city does not have standing to sue the state. On the 11th amendment issue, he found in favor of the state on the amendment, which protects state sovereignty. California officials contend that San Bernardino inappropriately held on to $15 million that belonged to the former city redevelopment agency and should be redistributed to school districts, special districts, and every other municipal entity that receives a split of property taxes, including the city itself.

Motor City Pensions & Bargains: Let the Voting Commence.  The State of Michigan on Monday cast its first ballots as a creditor on claims outlined in the debt-cutting plan in Detroit’s historic bankruptcy, when Michigan Gov. Rick Snyder voted to accept the terms of two ballots that call for the city to pay less than it owes to the state for work done at City Airport and for public safety gear it supplied to the Detroit Police Department. The state—as a creditor– has a total of 68 claims in the city’s bankruptcy, but not all of them will require ballots. The state has filed $9.8 million in unsecured claims. Under Detroit’s proposed plan of adjustment, the state is to receive 10-13 percent of about $62,000 the state is owed from the city for rehabilitation and runway construction the Michigan Department of Transportation made at Coleman A. Young Municipal Airport prior to the city’s bankruptcy. In addition, the state would receive only 25 percent of nearly $2,000 it is owed for safety vests for police officers provided through the state Department of Corrections. Officials say the state will be casting the remainder of its ballots as the week goes on—including on the largest—some $507.4 million in water bonds, which encompass sewer and water funds―which would not be impaired under the plan. Detroit’s 32,000 retired and active workers with earned pension benefits have until July 11th to vote whether to accept the state and private funds in exchange for smaller-than-expected pension cuts and giving up their legal rights to continue litigating.

Ride the Magic Bus. “By showing both the depths of the needs of the city and its residents, and the possibilities for rebirth and revitalization, the site visit will enable the court to better assess how the plan will allow the city to move forward as a viable municipality,” the City of Detroit told the U.S. Bankruptcy court yesterday in defending its proposed tour for U.S. Bankruptcy Judge Steven Rhodes—a tour the Motor City’s financial creditors, including bond insurers, oppose—calling the tour irrelevant and a wasteful use of limited trial time. But, in its filing, the city noted that in order to prove that its plan of adjustment is fair and feasible, it needs to “present evidence of its needs and challenges, and show how it can and will meet those needs and challenges.” Kevyn Orr has proposed a three-hour tour to view “relevant locations,” accompanied by U.S. Marshals or other security of the court’s choosing, including stops at blighted areas, the Detroit Institute of Arts, and downtown redevelopment areas, telling the court that its planned testimony and documents supporting the plan are abstract and no substitute for the context a live tour would provide. Judge Rhodes himself last month noted: “I do think it would be valuable.” The objectors: creditors Berkshire Hathaway Assurance Corp., Financial Guaranty Insurance Co., National Public Finance Guarantee Corp., and Syncora Guarantee Inc., along with several European banks that hold some of the city’s $1.4 billion of pension certificates of participation.

Revised Help Is on the Way. The State of Pennsylvania has agreed to provide Act 47 (the Keystone State’s program for distressed municipalities) assistance to help the city of Shamokin fix its fiscal woes—likely making the small city of 7,300 the first to go through the process after its overhaul by the state legislature. Shamokin is a city in Northumberland County, Pennsylvania, at the western edge of the Anthracite Coal Region. The community’s request for state assistance came in the wake of its inability to obtain get a loan to cover its budget deficit and about $800,000 in unpaid bills.  Pennsylvania’s Dept. of Community and Economic Development has announced that Shamokin will be the 28th municipality to attempt to stabilize its finances and recovery through Pennsylvania’s Act 47 program—a program whose current success rate is 25 percent—so that the newly enacted changes could provide a unique test. To date, most of the 21 Quaker State municipalities under Act 47 have been at it for more than a decade. The state is expected now to appoint a coordinator to oversee recovery, with the coordinator expected to put together a recovery plan in collaboration with local officials. A key provision of the pending, new state legislation would permit the state to dissolve Shamokin if the community is unable to return to fiscal stability within a specific timeframe—although state lawmakers say they believe that will happen rarely, partly because other amendments to Act 47 will speed and improve the process for getting dysfunctional local governments to the point that they can pay their bills while efficiently and effectively providing basic services. Nevertheless, under the time limits proposed by the bill, all but one municipality now under Act 47 would have faced the possibility of disincorporation. Under the revised Act 47, if recovery and merger attempts fail, the distressed municipality’s Act 47 coordinator would recommend disincorporation or municipal bankruptcy. The bill provides for the coordinator to seek a court order in lieu of the preferred options of an ordinance or voter referendum supporting the choice. Pennsylvania—with cities, counties, towns, and fist, second, and third class townships boasts an exceptional number of municipalities—local governments that have never consolidated or merged.  Moreover, the new state legislation does not add incentives for municipalities to merge or consolidate services, aside from codifying a state matching grant to fund studies for municipalities considering merging or consolidating services. But, under the new legislation, once disincorporation happens, a three-person advisory committee would work with the administrator to find contractors to provide services needed by the unincorporated service district (the former municipality)’s remaining population. The proposal does not stipulate that any of those committee members would have to reside in the territory―owning property or a business would be sufficient. The bill also allows Act 47 municipalities to levy local services and payroll preparation taxes, which under certain circumstances – mainly, pension distress – can be initiated without court approval and continue after state oversight ends.

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