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


March 3, 2015
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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.


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