What Happens If a Municipality Misses its Federally-imposed Deadline for Filing its Municipal Plan of Debt Adjustment?

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March 23, 2015
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Trying to Create a Sustainable Future. With San Bernardino’s federal court deadline bearing down on it, the municipality has sought to balance messaging to its citizens and taxpayers about the city’s straits and how it is trying to reemerge—even as the odds increase that its municipal bankruptcy submission might fail because of its inability to meet U.S. Bankruptcy Judge Meredith Jury’s deadline. The city’s auditor, Macias, Gini and O’Connell, LLP, has disclosed that it may not have all work completed in time for submission of San Bernardino’s plan of debt adjustment to the federal bankruptcy court by May 30th. Failure, Judge Jury has been explicit, will mean dismissal of the city’s bankruptcy petition―a dismissal that would put the bankrupt city in a legal twilight zone; dismissal would open the door to the figurative dismemberment of the municipality, as it would remove the bar imposed when its petition was accepted to creditors from going after the city’s assets: it would almost certainly force the MIA State of California to act, as such a catastrophic fiscal event would appear certain to mean the municipality would no longer be viable.

Democracy & Bankruptcy. Unlike states, such as Michigan and Rhode Island, where the elected leaders of a municipality which has filed for federal bankruptcy protection are summarily removed from authority unless and until the federal bankruptcy court approves said municipality’s exit plan, or plan of debt adjustment; in California—as in Alabama—the elected officials remain responsible for the operation of the municipality during municipal bankruptcy. Thus, they bear a responsibility to communicate to taxpayers and citizens throughout the formulation of the putting together a plan of debt adjustment. That is a singular challenge—indeed, it is one of the reasons some citizens in San Bernardino have suggested the Mayor and Council should hire a public relations firm: to both help citizens and taxpayers understand the process, and to avoid the peril of serious opposition from those who might “lose” under the city’s proposed plan of debt adjustment. Democracy carries burdens quite different than those confronted by a receiver or emergency manager. Notwithstanding, the San Bernardino Council has voted 4-3 to reject a proposed two-year contract, $215,000 contract with the public relations firm Tripepi Smith, with Councilman John Valdivia stating: “I think this is another wasteful, wanton abuse of the taxpayer,” who opposed the agreement along with Council Members Virginia Marquez, Benito Barrios and Henry Nickel: “I will not support this.” The vote came in the wake of interviews by a panel consisting mostly of city staff of potential firms.

The Unanticipated Costs of Municipal Distress. Hillary Russ of Reuters has reminded us of the harsh costs imposed by municipal fiscal distress—costs that, as we have seen in Michigan and Rhode Island—can fall upon the state, as well as the municipality. In New Jersey, the Ernst & Young tab for its analysis of Atlantic City’s financial distress will be in excess of $250,000—and that is only part of what the final tab will be. The state has hired E&Y on behalf of state-appointed emergency manager Kevin Lavin, who was appointed in January. In making its selection, New Jersey’s Law Department selected the firm on behalf of its client, the Department of Community Affairs, for which Mr. Lavin works, citing the firm’s experience working closely with Detroit’s bankruptcy team, with DCA spokesperson Tammori Petty stating that Ernst & Young’s Detroit experience included “all aspects of that city’s financial and operational restructuring and financial forecasting, and expert support and guidance, functions similar to the services they are providing” in Atlantic City. The tab so far is to finance the first phase of Ernst & Young’s work, which includes Mr. Lavin’s much anticipated report which is anticipated to be released any day now. But, in addition, E&Y will bill the state $455 per hour for longer-term services, such as liquidity forecasting, developing options to deal with cash flow problems, analyses of debt and revenues, and helping develop a restructuring plan, according to the agreement. On top of that, New Jersey is paying Mr. Lavin an annual salary of $135,000. The tab is likely to escalate, as that does not cover the services of Kevyn Orr—brought in after his work in Detroit, much less other professionals―especially if Messieurs Lavin and Orr recommend municipal bankruptcy for Atlantic City.

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