March 10, 2015
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Confronting Action to Avoid Municipal Bankruptcy. Wayne County, Michigan Executive Warren Evans has ordered a spending freeze for county government as he grapples with an impending financial crisis, stating: “This is the first step to resolve the county’s financial crisis…It’s critical we begin (to) take the necessary steps to solve our financial crisis and restore fiscal health. Reducing expenditures wherever possible must be our first priority.” The order, which includes a hiring freeze, was issued more than a month after Wayne County leaders warned that because of the county’s growing risk of a potential default — the surrounding county to Detroit could run out of cash next year and faces a $70-million structural deficit, as well as a pension system that is only about 45 percent funded. Under the freeze, all vacant positions will remain vacant and no employees will get a raise unless it is required under an existing contract. The order restricts overtime, travel, repairs, acquisitions, and other expenditures. The announcement came as the County Executive is trying to do everything in his power to try and prevent a takeover by the State of Michigan. Mr. Evans has now created an “executive review committee” to oversee the implementation of the freeze among other duties. The committee includes the county’s chief restructuring officer, budget director, corporation counsel, and his chief of staff. With the county under threat of burning through all its cash by a year from August absent extraordinary steps, Moody’s and S&P have downgraded the county’s bond rating to junk status—a ratcheting up putting the county between the Scylla of greater costs of borrowing and the Charybdis of greater requirements to borrow in order to remain afloat. Under Mr. Evans’ executive order, all vacant positions within the county will stay vacant, and no current employees will receive a pay increase unless mandated by a collective bargaining agreement: the order creates an executive review committee consisting of
• The County Executive’s chief of staff,
• The chief restructuring officer,
• The budget director,
• Corporation counsel, and
• Director of personnel/human resources or their designees “to implement further restrictions to increase savings and reduce expenditures.”
Under the order, there will be no renewal or replacement of employees working on a contractual basis unless deemed essential by the executive committee; the order also imposes restrictions on overtime, travel, operating services, supplies, professional services, acquisitions, major repairs, cellular phones, subscriptions, memberships, equipment and capital purchases—although it allows for exemptions to the hiring freeze for public health and safety, such as declared emergencies, expenditures for housing juvenile offenders in detention facilities, and budgeted sheriff deputies and assistant prosecutors. “Federal or state funded expenses, those mandated by the county charter, state or federal law, court orders and cooperative agreements, are also not affected,” according to the County.
Underwater in the Windy City. In a new filing on the MSRB’s EMMA, Chicago reports it is almost $400 million underwater on 24 swaps tied to $2.4 billion of floating-rate general obligation and revenue-backed paper. Nevertheless, the city has reported significant headway in curtailing the risks on its swaps portfolio: Chicago has terminated seven swap or swap options on $1 billion of floating-rate debt and restructured more favorable terms on termination triggers on 12 derivatives tied to $1.3 billion of debt since 2011, according to its filing. Most of the financial transactions which are today coming back to haunt the city are vestiges of the former administration of Mayor Richard M. Daley—and all, today, have a negative mark-to-market, adding to the steady deterioration of the city’s credit ratings, as laid out in its filing of its swap portfolio, letter of credits, direct purchase facilities, and line of credit agreements last Friday in the wake of Moody’s credit rating downgrade. CFO Lois Scott, in her introductory note, wrote: “The city is also providing voluntary disclosure of certain other recent events…The city is not obligated to provide further additional updated or supplemental information with respect to the bonds except as otherwise required.” The downgrade initially triggered termination events on four swaps, according to Moody’s. To avoid a separate $20 million payment related to currency valuations, Chicago has renegotiated terms with BMO Harris Bank on a $66.8 million floating-to-fixed-rate swap that was part of a $223 million 2005 floating rate GO issue; Chicago reported in its filing that the latest downgrade triggered termination events on three interest rate swap contracts with Wells Fargo Bank with a negative valuation of $38 million. In addition, in its new filing, Chicago reported it has posted as collateral a letter of credit issued by PNC Bank in connection with a 2005 sale/leaseback transaction the city entered into in 2005 on the city-owned portion of the Orange Line rail transit route to Midway Airport—a lease scheduled to last through 2031. The new, voluntary disclosure come as part of the ongoing, leadership effort by CFO Scott to improve investor relations through better disclosure—steps regarded by observers as critical if the city hopes to keep in check its already steep interest rate penalties due to concerns over its solvency. It also illustrates the precipitous issues that could trigger further credit rating deterioration for the city, including an adverse ruling by the Illinois Supreme Court on state-level pension reforms, growth in direct and overlapping debt, and a narrowing of city reserves. On the public pension front, the new disclosure provides an update on a legal challenge launched by unions, retirees, and employees against the reforms approved by the Illinois Legislature last year to Chicago’s municipal and laborers’ funds—funds which were on course to exhaust assets in 2026 and 2029, respectively, noting that, should the reforms be reversed or voided by the courts, “[I]t is not clear whether or how the unfunded status or insolvency of the two affected pension funds might be resolved or what, if any, impact such a resolution may have on the city.” Should the Windy City’s credit ratings slide more, it could be confronted, moreover, with even more swap termination triggers—or, as the disclosure puts it: “The city intends to continue managing the risks associated with its variable rate debt and swaps by renegotiating or terminating swaps and converting variable rate debt to fixed rate when market opportunities warrant.” Any termination payments due in the future on the city’s revenue bond credits would be drawn from pledged revenue streams. A default under the city’s revolving lines of credit would allow the termination of its credit facilities, requiring Chicago to immediately pay all outstanding amounts. The city currently has $294 million outstanding under its short term borrowing program which has a capacity of $900 million. An additional draw of $170 million is expected this month.
On the Horns of a Nebraskan Dilemma. As we have noted in covering municipal bankruptcies, the greatest tension in resolving or agreeing upon a plan of debt adjustment tends to be between a municipality’s bondholders versus its public retirees or pensioners. Now, in the Cornhusker state, the Nebraska Banking, Commerce and Insurance Committee has approved and reported municipal bankruptcy amendments, Legislative Bill 67, to the floor of the state’s unicameral legislature. Between 1980 and 2012, some 55 Cornhusker utility districts have sought such protection—triggering current law provisions under which, if one-third of resident freeholder’s petition, the municipality is required to enter into negotiation. LB 67 would amend the law to provide general obligation bondholders a statutory lien to ensure their payment priority over all other creditors, including municipal public pensioners, in the event of a municipal bankruptcy. Nebraska State Sen. Paul Schumacher said the proposal to amend the state’s municipal bankruptcy statute is an effort to address on a state level the national uncertainty about the status of pensions versus bondholder battles that emerged during the municipal bankruptcies of Detroit and Stockton. A lobbyist for the Nebraska bankers association was the sole supporter of LB 67 during last week’s public hearing, but the proposed legislation drew opposition from municipal leaders from Omaha and Lincoln, who testified that the issue of creditor preference should be, as it is under current federal law, left up to a federal bankruptcy judge.