March 27, 2015
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Taking Stock in Stockton. Franklin Templeton Investments has filed its first brief (Appeal from the United States Bankruptcy Court for the Eastern District of California, Case No. 12-32118, U.S. 9th Circuit Court of Appeal) to U.S. Bankruptcy Judge Christopher Klein’s approval, last October 30th, of Stockton’s plan of debt adjustment—allowing the city to exit municipal bankruptcy and to begin to implement its fiscal recovery plan. Franklin’s brief follows in the wake of its November request to the city’s exit plan—a rejection Judge Klein formally rejected last month, writing that Stockton could proceed in implementing its recovery plan and opining that Franklin’s likelihood of winning on appeal was slim. In its revised brief, Franklin Templeton asserts that Judge Klein erred in approving Stockton’s plan of debt adjustment, because, according to Franklin, the plan was “discriminatory and punitive” against Franklin. Stockton has until May 28th to respond. The city, which declared bankruptcy in July 2012, has developed a long-range financial plan for the duration of the agreements in its federally approved plan of adjustment, some of which extend out to 2053. Franklin’s objections center on the significant disparity between how it is treated under that plan versus the California Public Employee’s Retirement System (CalPERS), with Franklin getting back about one cent on the dollar of what it is owed, versus CalPERS being fully repaid. Absent a success on its challenge, Franklin will remain at risk of nearly a 99% loss on the $35 million of the city’s municipal bonds which it owns. All other major creditors settled with the city ahead of the bankruptcy confirmation. Whilst Franklin has asserted its recovery rate on its unsecured municipal bonds was less than 1%, the city’s attorneys have responded in a filing that Franklin’s total recovery rate on secured and unsecured claims is closer to 17.5%. Franklin will receive $2.1 million in collateral from the bond reserve account that is not accounted for in Judge Klein’s opinion, $4.05 million from the sale of a golf course, plus the $285,227 on its unsecured claim for a total of $6.4 million — equal to a 17.5% total recovery on the $36.6 million claim, according to the city’s filing. Stockton Record columnist Michael Fitzgerald, writing about how the city’s leaders handled its bankruptcy process and the opportunities which are now possible, emphasized lessons that public officials, municipal employees, city residents, and policy makers can take away from Stockton’s Chapter 9 Federal bankruptcy process, with the most significant being to keep politics from policy making. “If I could boil the lessons of Stockton’s crash down to one point, it would be this: Don’t allow city fiscal policy to be politicized.” He stresses that strong fiscal policy cannot be crafted under the pressure of special interests. From these lessons, Stockton can look to the future, and begin to reimagine its downtown and create new economic development….the city is now running on a smart fiscal model, the economy is recovering, and, for that matter, it’s spring. Stocktonians are looking at a new beginning.”
Getting Moody in Atlantic City. Credit rating agency Moody’s has responded moodily to New Jersey’s state-appointed emergency manager’s report with regard to Atlantic City’s fiscal crisis, calling the plan a credit negative which could pave the way to default. Analysts Josellyn Yousef, Orlie Prince, and Naomi Richman wrote that in addition to opening up the possibility of the city defaulting on its debt, the timeline proposed by emergency manager Kevin Lavin relies on rapid legislative action, state aid and “timely tax payments from struggling casinos―” adding that Atlantic City is also at fiscal risk of losing access to the capital markets by next Tuesday if it does not receive an extension of $40 million loan payment from the state. Noting that the Lavin report calls for the legislature to pass two bills proposed late last year which would direct $17.5 million in excess investment alternative taxes on gaming revenues and $30 million of Atlantic City Alliance marketing funds to the city, Moody’s noted that debt service payments due on Aug. 1st and Dec. 15th may be at risk if the two bills are not “swiftly” adopted and the state does not provide a timely revenue infusion. The analysts also noted that Mr. Lavin proposed that Atlantic City delay or defer $42 million in state health and pension benefits for the year―but such a delay could require state approval: “Given the city’s cash flow projections and assuming that pension and health benefit payments are delayed or deferred, the state legislature will have only three months to adopt the two bills before the city reaches a liquidity and debt service crisis.” The three Moody musketeers added, referring to Mr. Lavin: “His potential options for long-term restructuring include potential impairment to bondholders in the form of restructuring amortization schedules and the extension of maturities. We may consider any of these events to be a default or distressed exchange…” The trio expressed concerns, in addition, with regard to the odds (no pun) for late or delinquent property taxes from casinos—an apprehension, they noted, not reflected in what they termed “already dire liquidity projections” in the Lavin report.
Keystone Municipal Fiscal Sustainability. Even as the State of New Jersey is divided and legally unclear what its role and responsibility is with regard to the fiscal fate of Atlantic City, right next door, the Keystone State’s Senate Appropriations Committee yesterday gave close consideration to issues and concerns relating to stabilizing municipal fiscal distress. Legislators wanted to know whether state economic development incentives were working; they want cost-benefit analyses; they want to understand whether and how economic development incentives are working. Referring to Pennsylvania’s Neighborhood Improvement Zone program, State Rep. David Argall (R-Berks/Schuylkill) told the state’s acting Department of Community and Economic Development (DCED) Secretary Dennis Davin, referring to the program which was designed to help revive Allentown: “I haven’t seen that kind of revitalization in a community since Berlin Wall came down…but you don’t sound like you’re a fan.” Sec. Davin responded noted: “My only response was, essentially, based on…the Governor’s proposal and different look at tax structure, perhaps there will be a time when it might not be necessary,” adding that he has the same views with regard to the Community Revitalization Zone program. The Secretary noted his department is slated to receive funding restored to levels of two years ago for its Keystone Communities economic development programs, and intends to partner with universities to encourage research and training for the manufacturing sector. A different kind, but mayhap greater concern was expressed with the purported $8 billion municipal public pension debt, with Sen. Randy Vulakovich warning: “They (Pa. municipalities) are never going to get out of it. We’re going to have to do to bring something together on the state level.” Sen. Vulakovich subsequently elaborated, stating he thinks the state should force severely distressed pension funds (those with less than half costs projected for retirees and retirement payments to working public employees, once retired) into the Pennsylvania Municipal Retirement System (PMRS). PMRS manages about 600 of the state’s approximately 2,000 local pension funds; the remainder deposit their funds with private firms, an appointed board, or both. The state also provides aid to distressed local pensions, basically offsetting the required minimum amount the municipality (as employer) must pay into the pension fund in any given year. The fiscal dilemma comes as DCED has another $1 million this fiscal year for its early intervention program―less than half a percent of DCED’s total allotment of the state’s general fund budget, yet sufficient to boost funding for early intervention by 50 percent: the intervention program attempts to help cash-strapped local governments avoid a full-blow fiscal crisis. DCED’s most able Local Government Center Executive Director Fred Reddig reports the extra funding will let the state help more municipalities—help which could prove increasingly critical given the local pension situation. This comes, moreover, as Mr. Reddig is charged with realigning the state’s Act 47 program (the next step in state intervention), which, under changes enacted last year, now limits cities to five years, before a municipality may be dissolved.