April 27, 2015
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Post Municipal Bankruptcy Planning. Even as San Bernardino’s elected and appointed leaders are desperately working to meet U.S. Bankruptcy Judge Meredith Jury’s May 30 deadline to submit the bankruptcy city’s plan of debt adjustment, they are also trying to chart of post-bankruptcy future—and trying to accomplish this exceptional challenge in public meetings and discussions. The city’s-hired consultant Friday noted that San Bernardino’s charter is a significant obstacle, calling it not only “unusual,” but also the greatest obstacle to the city’s fiscal, or post-bankruptcy future, saying its structure and vagueness “leads to turf fighting, friction, and difficulty getting things done.” The consultant, Andrew Belknap, a regional vice president for San Jose-based Management Partners, told the public meeting the city’s charter is a contributing factor to the city’s operational structure being “more complicated than other cities of its size.” Mr. Belknap presented a 19-page draft document: a draft which included priority goals in several areas: public safety, education and workforce development, quality of life, infrastructure and housing, business development and job creation, community engagement, public relations, and governance. This was not a new issue to the 17 gathered local leaders from various fields, including elected leaders, education, and business when they began this profound effort to remap a municipality’s future last March, but reaching some agreement has become increasingly urgent as the clock is ticking down. Unlike a private corporate bankruptcy, where the issue is about dissolving, municipal bankruptcy is a complex process that must encompass ongoing operations, exceptionally complex negotiations between all the creditors in order to put together and submit to a federal court a proposed plan of debt adjustment—but also a sustainable fiscal map for the future. Or, as San Bernardino County CEO Greg Devereaux, a committee member, and a former Ontario city manager put it: “It’s one thing to have goals, but there needs to be a decision about what is the job of the city and the role of the city in these goals.” Thus, interestingly, at the public meeting Friday, city staff also proposed, as part of the draft Strategic Action Plan: spending $1.7 million on ongoing additional emergency response personnel; $1.5 million for improved library hours, technology, and resources; and $300,000 annually for a repaid response team to rehabilitate vacant and boarded-up structures. Mike Gallo, president of the San Bernardino City Unified School board, and a member of the 17-member citizens group described that as “the most encouraging and surprising thing to come out of the meeting…It was the first time I have seen the city staff engaged in the planning process with the community…I could hear in their voices and see in their eyes that they were excited.” A related part of Friday’s discussion was to review the six guiding principles for the city’s strategic action plan, including the plan to form “a sustainable local government delivering a competitive mix of municipal services” and the city forming a “system of governance that is proven to ‘support satisfactory performance by other municipal corporations of comparable size and complexity.’” But, as Mr. Gallo responded: “This is the lowest expectation I can possibly imagine: We want to prosper. Not just set the floor.” An intriguing part of this discussion came near the end with a discussion between the city’s former and current mayors: former Mayor Pat Morris said he agreed with Mr. Gallo that the proposed mission statement was “mundane in the extreme;” he said the strategic plan needed to align more closely with the ambitions of the priority goals. Nonetheless, the former Mayor praised the meeting overall: “This process is unique in the city’s history…This process is important not just for the strategic plan, but for the advocacy for change.”
Running Out of Time. Standard & Poor’s has significantly downgraded Puerto Rico’s general obligation debt from a B rating down to a CCC plus grade, meaning S&P now grades the U.S. commonwealth’s debt rating four notches above the lowest possible grade of “default.” With Congress set to recess at the end of this week, the U.S. territory’s options for avoiding insolvency and default are waning. S&P reasoned that the island’s access to markets has further weakened, and that political problems, particularly a lack of consensus on elements of the 2016 budget, could further worsen fiscal pressure on the territory: “We base our downgrade…on our view that the commonwealth’s market access prospects have further weakened and Puerto Rico’s ability to meet its financial commitments is increasingly tied to the business, financial, and economic conditions on the island. Absent improvement in those conditions, we believe debt and other financial commitments will be unsustainable.” S&P’s sovereign downgrade came in the wake of the credit rating agency’s earlier downgrade of the Puerto Rico Electric Power Authority (PREPA) to CCC-minus from CCC, with S&P analyst Jeffrey Panger writing that a default seemed inevitable within six months. S&P reported it is concerned by PREPA’s repeated draws on its debt service reserve: PREPA withdrew $42 million in July of 2014, $9 million in October, and then $9 million this month, leading Mr. Panger to write: “We believe a default, distressed exchange, or redemption appears to be inevitable within six months, absent unexpected significantly favorable changes in the authority’s circumstances.” Mr. Panger also noted PREPA had a structural shortfall of revenues compared to expenses and a questionable access to the capital markets―and that it is unclear if PREPA could draw on the $236 million it has on deposit at the Government Development Bank for Puerto Rico. The public utility has $8.3 billion in bonds outstanding. Additional debt brings its debt total to over $9 billion. Both Moody’s and Fitch Ratings predicted a PREPA default is likely.
April 24, 2015
Facilitating Recovery from Municipal Bankruptcy. Stating that “We need to ensure Detroit’s debt is repaid under the terms of the bankruptcy to allow the city to continue its recovery,” Michigan Gov. Rick Snyder yesterday signed into law SB 160, new legislation, adopted overwhelmingly (107-3) in the House last Wednesday, which will provide the city’s municipal bondholders a statutory lien and intercept on Detroit’s income tax. The Governor added: “The savings from lower interest costs will allow Detroit to reinvest in critical areas like public safety and municipal services.” The state actions will likely not only pave the way for the Motor City’s reentry into the municipal bond arena, but also avert any potential adverse credit contagion for other cities and counties across the state. It marked still another sign of essential state support for the city’s future. SB 160 was enacted to create support for some $275 million in municipal income-tax backed bonds that the city privately placed with Barclays last December when it emerged from municipal bankruptcy. The agreement with Barclays required Detroit to roll its debt into long-term municipal bonds within 150 days of the placement—marking the key event of the city’s first post-bankruptcy public financing. While Gov. Snyder called the bill a “technical fix,” it marks not just a milestone in the city’s return to the municipal market, but also a legal step which could save the city and its taxpayers some $20 million and $30 million in interest costs over the life of the bonds. Under Detroit’s agreement with Barclays, it will have to obtain at least two credit ratings; consequently, city officials hope the new statutory lien and intercept feature will win investment-grade ratings for the debt―currently all of the city’s bond debt is junk rated. Fiscal analysts reviewing the new law said the lien and intercept could save the city between $2 million and $3 million a year on debt service: the $275 million of bonds, which currently feature eight- and 10-year maturities, are Detroit’s only debt backed by an income tax pledge.
It Ain’t Over Until It’s Over. The U.S. 11th Circuit Court of Appeals yesterday ruled that Jefferson County, Ala., can proceed with an appeal related to the county’s plan of debt adjustment in which the County is challenging last year’s decision by U.S. District Judge Sharon Blackburn to reject Jefferson County’s position that its successful exit from municipal bankruptcy cannot be unwound, because its plan of adjustment has been largely consummated. While the appeal is specific to the county’s municipal bankruptcy, its outcome could have reverberations for cities and counties across the nation: in this case, both the Securities Industry and Financial Markets Association and the National Association of Bond Lawyers have filed amicus briefs claiming that a determination by the 11th Circuit Court of Appeals is essential to the stability of the municipal bond market and the certainty of future Chapter 9 bankruptcy cases—briefs accepted by the court this week. The issue revolves around U.S. Bankruptcy Judge Thomas Bennett’s confirmation of Jefferson County’s plan of debt adjustment from two and a half years’ ago—a confirmation which cleared the way for Jefferson County to proceed with the sale of $1.8 billion in sewer refunding warrants to write down $3.1 billion in related outstanding debt. That plan, as approved by the federal court, included provisions to protect new bondholders, including what some believe to be a precedent-setting provision under which that the federal bankruptcy court would continue to oversee promises made by Jefferson County to raise sewer rates over the next 40 years in order to service the sewer debt. But Judge Bennett’s confirmation was appealed by former broker-dealer Calvin Grigsby, a financial advisor and attorney representing a group of local residents and elected officials who are ratepayers to the county’s sewer system—an appeal which Jefferson County sought to dismiss; Jefferson County argued the appeal was constitutionally, statutorily, and equitably moot, because its approved plan of debt adjustment had been largely consummated, and because the ratepayers failed to ask the federal court to issue a stay which would have delayed implementation of the plan during the pendency of an appeal. Nevertheless, Judge Blackburn last September held that the ratepayers could continue their challenge, and that she could find some portions of the confirmation plan unconstitutional. In its amicus brief, the Securities Industry and Financial Markets Association wrote that a prompt review of the lower court’s decision was “imperative to the continued stability and accessibility of the municipal bond market…Accepting the petition will resolve the uncertainty caused by the challenged order about the finality and integrity of confirmed, non-stayed plans of adjustment that contemplate an emerging debtor’s issuance of new bonds or warrants to finance governmental projects and operations, thereby enhancing market acceptance.” The National Association of Bond Lawyers, in their amicus brief, wrote that resolving uncertainties with regard to the finality of U.S. Bankruptcy Court decisions with regard to cities’ or counties final plans of debt adjustment “would assist other financially challenged municipalities who are considering using the Chapter 9 plan process as a way of successfully accessing the public financial markets and to purchase of bonds proposed to be issued under confirmed Chapter 9 plans.”
How Do City’s Leaders Communicate to Citizens & Taxpayers in Preparing a Municipality’s Plan of Debt Adjustment to Exit Municipal Bankruptcy? Meanwhile, in San Bernardino, which is struggling to complete its own plan of debt adjustment under an-ever approaching deadline set by the U.S. Bankruptcy Court, the challenge of juggling the completion of that plan with the city’s responsibility to keep in communication with its citizens and taxpayers has continued to prove to be an exceptional challenge. How, after all, can one fashion a plan that attempts to divvy up far less than what one owes to thousands upon thousands of a city’s creditors—many of whom, after all, are city residents or businesses and taxpayers, in public? Would it be like a football team televising its deliberations in the huddle before the next play? This challenge of democracy in municipalities like Stockton and Jefferson County—and unlike in Detroit or Central Falls, Rhode Island—cities where the state municipal bankruptcy law, by means of the imposition of a receiver or emergency manager removed traditional obligations of transparency with citizens and taxpayers—is a more difficult hurdle. To give an idea of how difficult the process is, a struggle has erupted in San Bernardino with regard to whether a public meeting of the group leading the city’s strategic planning process last night should have been recorded or not — but not broadcast live — has consumed endless hours and emotions. Until Wednesday, City Manager Allen Parker had told City Council members and residents who requested a video recording of the daytime meeting — a meeting, after all, intended by key San Bernardino leaders to both communicate and secure support from the city’s citizens and taxpayers for any final plan of debt adjustment it will submit to U.S. Bankruptcy Judge Meredith Jury next month, that only an audio recording would be available. The decision, Mr. Parker wrote in an email Tuesday night, was made by school Superintendent Dale Marsden, whose San Bernardino City Unified School District both hosted and paid for the event and facilitator, because that facilitator was concerned participants would not speak candidly were it televised live—a decision that appeared to do more harm than good: it outraged Council Members and residents on both sides of the political aisle that divides San Bernardino citizens—or, as one city resident wrote: “We have been told repeatedly that our involvement in the Plan of Adjustment is critical to the success & implementation…Why the decision on this is not at city level is baffling. Why you have decided contrary to the city administration request to televise is mind numbing. The decision to not televise damages the credibility of the process and further amplifies the growing apathy in our city.”