The Messy, prohibitively Expensive, and daunting Challenges of Municipal Bankruptcy & The Remarkable Differences Imposed by Contrasting State Enabling Laws

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March 5, 2015
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Savoring the Comeback. Standard & Poor’s this week revised its long-term outlook on Central Falls—or Chocolateville’s―credit rating on its full faith and credit GO bonds from stable to positive, even as the small city retained its junk-level BB long-term rating. The post municipal bankruptcy city, Rhode Island’s smallest (19,000 population), continues on its road to recovery in the wake of then-Governor Lincoln Chaffee appointment of former Rhode Island Supreme Court Justice Robert Flanders as receiver in the wake of its filing for municipal bankruptcy protection in August 2011, reporting an $80 million unfunded pension liability. In one of Judge Flanders’ earliest actions, he imposed benefit cuts of up to 55% for retirees—albeit these reductions were subsequently modified by the former Chafee administration. S&P analyst Victor Medeiros wrote: “The outlook revision reflects our opinion of the city’s ongoing adherence to its established post-bankruptcy plan and improved financial management controls that we believe will likely be sustained and continue to translate into it maintaining stable operations…At the same time, we expect the city to remain proactive in funding its long-term liabilities, ensuring those costs and overall budgetary performance remain stable and strong over the long term.” According to Mr. Medeiros, for S&P to consider raising Central Falls’ rating, Chocolateville would need to adhere to its to its long-term plan of debt adjustment: “In our opinion, the city’s stable budgetary environment and continued progress toward funding long-term liabilities would be additional factors in our raising the rating.”

Expanding Municipal Bankruptcy Protection. California State Sen. Marty Block has introduced legislation to expand chapter 9 municipal bankruptcy protection to school district general obligation bonds. The bill, Senate Bill 222, would amend section 15251 of the California Education Code to clarify the process of lien perfection for general obligation bonds issued by or on behalf of California school and community college districts—a change which is intended to clarify that the lien that is created is a “statutory” lien, thereby potentially reducing the risk of bankruptcy for G.O. bonds issued by K-14 general obligation bond issuers in the Golden State—and, its author hopes, potentially enhancing the districts’ credit ratings and reducing their interest rates—an action which some believe would remove the extra step between the issuance of general obligation bonds by a school or community college district and the imposition of a lien on the future ad valorem property taxes that are the source of repayment of the G.O. bonds. The bill’s introduction comes in the wake of uncertainty over potential treatment of revenues pledged to pay a municipality’s general obligation bonds—and the mechanisms under differing state laws with regard to the imposition of liens to secure the repayment of full faith and credit bonds issued by cities, counties, and school districts—or as the ever-marvelous Municipal Market Analytics describes it, the bill “clarifies that voter-approved general obligation school district bonds benefit from a statutory lien on the levy and collection of the tax revenues without any further action, insulating them from impairment in a Chapter 9 proceeding,” an action which should, according to MMA, reduce the cost of the debt to the issuing school district—especially for more fiscally challenged ones. Fabulous Matt Fabian of MMA notes that recent municipal bankruptcy cases like Detroit’s have raised questions about the strength of a city or school district’s pledge, making it, in his words, “imperative that states examine statutes to ensure that they are clear in their intent.” The underlying issue (no pun) relates to – in bankruptcy – secured and unsecured claims, ergo, the need to ensure a lien is statutory, as opposed to one created by an agreement to create a security interest. Sen. Block’s proposed legislation would clarify that the statutory lien arises automatically without further action or authorization by the school or community college district.

Detroit’s Future. Michigan Gov. Rick Snyder expects “relatively quick legislative action” from the state’s legislature as soon as the Coalition for the Future of Detroit Schoolchildren submits its final report examining the school’s fractured, fragmented, and nearly insolvent school system and recommendations later this month. The coalition is co-chaired by Tonya Allen, president and CEO of the Detroit-based Skillman Foundation; the Rev. Wendell Anthony of Fellowship Chapel and the president of the Detroit branch of the NAACP; David Hecker, president of AFT Michigan/AFL-CIO; John Rakolta Jr., CEO of Detroit-based Walbridge Aldinger Co.; and Angela Reyes, executive director of the Detroit Hispanic Development Corp.

State of the City. San Bernardino Mayor Carey Davis, armed with 500 opinions from citizens in the wake of a series of community engagement events intended to both keep citizens apprised of the city’s plans to put together its plan of debt adjustment in order to secure U.S. Bankruptcy Judge Meredith Jury’s approval so that the city could exit municipal bankruptcy, but also to seek their input through a series of community events, tomorrow evening reports back on what he sees as the state of his city—and what he believes the city’s future could be, marking his first such speech since he took office a year ago. In a release from his office, the Mayor said: “The State of the City address brings together the business community, our educational institutions, residents, and others who have a vested interest in San Bernardino’s future…I look forward to highlighting accomplishments over the last year, and hope to build upon those successes as we move forward into 2015 and beyond.” The ambitious effort to both inform and seek input from citizens and taxpayers informs us of the significant differences prescribed or permitted under differing state statutes of those states which enable municipalities to file for federal bankruptcy protection—so that in Michigan and Rhode Island, for instance, cities’ elected leaders, citizens, and taxpayers are excluded from any say or input in the process; but in Alabama, California, and other states; the messy, prohibitively expensive, and daunting challenges of public, democratic practices compel local leaders to inform, engage, and involve citizens and taxpayers.

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