August 13, 2014
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Getting Ready to Rumble. Attorneys representing the Motor City and its creditors are due before U.S. Bankruptcy Judge Steven Rhodes this morning for discussions with regard to the confirmation process for Detroit’s debt restructuring in anticipation of the historic trial scheduled to commence a week from tomorrow. The anticipation is that Judge Rhodes will set deadlines and hearing dates for the trial, which is expected to last well into September, to determine if Judge Rhodes will approve the city’s proposed plan of adjustment—allowing the city to emerge from the largest municipal bankruptcy in history by finding that that plan is fair and feasible. On that same afternoon, farther west in Minneapolis at the National Conference of State Legislatures’ 2014 Legislative Summit, we will be moderating a session on Municipal Bankruptcy: “What are states to do when a locality heads south?” The panel features Richard Ravitch, who not only served as Lieutenant Governor in New York and played a critical role in New York City’s near default, but also served in a unique role as a consultant appointed by Judge Rhodes in the Detroit bankruptcy case; Kil Huh, who directs the Pew Center’s work on state and local fiscal health; and U.S. Bankruptcy Judge Thomas Bennett, who oversaw the largest municipal bankruptcy case in American history prior to Detroit’s case—Jefferson County, Alabama.
Homework. With next week’s historic trial set to focus on the disposition of some $18 billion in municipal bond debt, the National Association of Bond Lawyers yesterday released the General Obligation Bonds: State Law, Bankruptcy and Disclosure Considerations, a timely document to assist its own members and other state and local public finance participants better understand the labarynthian world of municipal bonds, especially focusing on general obligation or GO bonds, with a focus on the characteristics of general obligation bonds, state law remedies, municipal bankruptcy, and disclosure considerations. The release emphasizes that, lo and behold, not all general obligation municipal bonds issued by a state, local government, school board, or other public entity enjoy the same security or the same remedies for enforcement of the promise to pay. In addition, as we are likely to learn over the coming weeks as we focus on the trial in downtown Detroit, how a state or local government’s GO bonds are treated in a bankruptcy is uncertain. Although the disclosure for general obligation bonds provided in Official Statements must be tailored to each general obligation bond, the paper does discuss topics that should be considered in preparing an Official Statement for an offering of general obligation bonds. The paper is the brainchild of the organization’s current President, Allen Robertson, who originated the concept as he took office in Chicago last year—in no small part to help state and local leaders better appreciate and understand that while there has been a general assumption that all general obligation bonds are backed by a state or local government’s full faith and credit (e.g. said government has committed to raise taxes to ensure interest payments to all bondholders if necessary), NABL’s new paper tartly notes: “It has become apparent that all general obligations bonds do not enjoy the same security or the same remedies for enforcement of the promise to pay under state or local law…Further, the treatment of general obligation bonds in a Chapter 9 bankruptcy case is uncertain and will depend on the security provided by applicable state law,” adding that the characteristics of GO bonds are determined by state laws and local ordinances, so that the source and security for debt service payments on the bonds may vary from one issuer to another; moreover, NABL adds, some GO bonds are only supported by either a pledge or the issuing state or municipality’s full faith and credit or a pledge of the issuing state or local government’s taxing power, rather than by both. Further, the report finds that the characteristics of an issuer’s full faith and credit obligations vary from state to state. Moreover, for anyone not yet confused, the special report reminds us that there are three general kinds or types of GO bonds: unlimited tax, limited tax, and bonds payable from the issuing government’s general fund—and, even beyond that, the report reminds us that there are variations across state and local governments on exactly what these terms mean. The report examines options bondholders might have in the event of nonpayment of timely tax-exempt GO bond interest under respective state laws prior to a municipal bankruptcy filing—with such remedies dependent upon differing state constitutions and statutes, as well as whatever specific commitments a state or local issuer of GO debt promised to take to ensure payment—with the main remedy being to have a court issue a writ of mandamus, compelling a public official to pay the debt service―albeit, according to the paper, judges, as a rule, are limited in their authority to issue these types of writs if the duty to pay the debt service is mandatory and imposed by state law. Moreover, the paper adds, a state or local government may try to frustrate enforcement of the writ, and federal bankruptcy courts may be unwilling to issue writs when there is a need for governments to prioritize the provision of essential public services to their citizens.