June 3, 2015
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Fire in the Hole. San Bernardino Mayor Carey Davis and Councilwoman Virginia Marquez journeyed north yesterday to Gov. Jerry Brown’s office to seek assistance on six issues important to the city’s ability to not just emerge from municipal bankruptcy, but also to be able to realize a sustainable fiscal future. The key issue was to obtain the Governor’s support for getting Cal Fire—which serves or provides contract fire services to some 150 cities, counties, and special districts in the state, including in the regions around San Bernardino, to submit a bid, noting that the sharing of such services would save taxpayers money. In addition, the Mayor and Council requested the Gov.’s assistance in reversing what the city deemed a “penalty” of $2 million imposed on the city by the California Public Retirement System (CalPERS); removing the cash hold and threat of decertification of the San Bernardino Employment and Training Agency—San Bernardino’s local workforce development organization, and a key to its plan of debt adjustment provisions for sustainability; access to the state’s California Infrastructure Bank—especially for critical seismic rehab and its recycled water project; support for pending state legislation which would permit the City, should it opt for shared fire services with San Bernardino County, to transfer the assets and liabilities associated with its CalPERS services for its fire employees; help in dissolving its former redevelopment agency; and, finally, assistance in modifications of the way Amazon is taxed, so that instead of the current method—in which Amazon e-commerce centers are effectively deemed as sited statewide, rather than in the municipality—meaning that San Bernardino, which hosts not one, but two Amazon distribution centers which comprise over 1.5 million square feet, imposing significant traffic demands, are subject only to a 1% sales and use tax—the proceeds of which are shared statewide. The San Bernardino delegation received no promises on any of the sextet of issues they raised, but appeared positive both that the Gov.’s office seemed well-briefed on the city’s issues and that the delegation will receive specific responses to the issues and concerns they raised—issued presented in their five-page letter to the Governor and their Sacramento delegation of state Senators Connie Leyva and Mike Morrell and Assembly Members Cheryl Brown and Marc Steinorth. Shared fire services has been a key issue for San Bernardino, but Cal Fire has been, to date, the most recalcitrant about engaging and has consistently rejected San Bernardino’s attempts to have the state agency prepare an estimate of what it would cost to provide fire services for the city, citing the city’s financial instability “and the difference in staffing models between Cal Fire and the City.” Thus, in their epistle, the Mayor and his fellow Councilmembers noted that elected state officials have authority over the agency and that they should insist upon a proposal. At the same time, the letter notes the city is achieving some progress: San Bernardino County and a private firm have each responded to the city’s RFP, with each response, according to the city, noting that “both indicate that significant efficiencies are available.” Because San Bernardino’s plan of adjustment submitted at the end of last week to U.S. Bankruptcy Judge Meredith Jury assumes some $7 million annually in saving through the outsourcing of fire services, one can appreciate how important the issue is. Assembly Member Steinorth (R-Rancho Cucamonga), after the meeting yesterday, noted: “The idea of the meeting today was to engage the Governor’s office and the office of the mayor and council to determine what resources are available to our city to help during this transitional period…They were very receptive, very astute. You could tell they paid very close attention. The mayor and the council members were very prepared and had all the supporting documentation to help them with their discussion and their request.”
Fighting over the Dregs
. With Congress apparently disinterested in the fiscal fate of the 3.6 million Americans living in 78 municipalities in Puerto Rico, meaning the U.S. Bankruptcy Court is unavailable to serve as an adult referee among the territory’s many, many classes of creditors; hedge funds and money managers are engaged in a growing war over the credit market’s scrap heaps. Bloomberg notes that some distressed-debt buyers are already engaging in what promises to be a trench war over the U.S. territory’s $72 billion of debt, a war which could pit investors such as Fir Tree Partners, which is among the firms which have purchased some $4.5 billion of municipal bonds—bonds which Puerto Rico must make payments on ahead of others of the territory’s debt obligations―against creditors, including Angelo Gordon & Co. and Knighthead Capital Management, who own a majority of the more than $8 billion of debt owed by the Puerto Rico Electric Power Authority (PREPA), which met with the financial adviser to its creditors Monday in an effort to restart restructuring negotiations—negotiations which could ask its bondholders to take a loss or wait longer to be repaid. According to Barclays Plc municipal-debt strategist Mikhail Foux, the island’s hedge funds now hold as much as 30 percent of the obligations of Puerto Rico and its agencies, or, as Joseph Rosenblum, director of municipal-credit research at AllianceBernstein Holding LP puts it: “It’s extremely disorderly and nasty…[this] messy approach to trying to resolve something with no clear structure or guidance doesn’t give a municipal bondholder any kind of confidence.” Bloomberg puts it concisely: “The reason so much hedge-fund money is riding on the island is simple: an increasing number of distressed-debt funds are chasing a declining number of opportunities. Little wreckage remains from the 2008 financial crisis, and six years of central-bank stimulus has kept tomorrow’s bankrupt companies flush with cash.” Ironically, two of the biggest borrowers that teetered after the financial crisis, Energy Future Holdings Corp., the Texas power producer formerly known as TXU Corp., and the main operating unit of Caesars Entertainment Corp., are now in the hands of federal bankruptcy judges—hands from which Congress has effectively barred Puerto Rico and its municipalities. Thus, with an eruption in growth of 24 new distressed-credit funds last year, the highest number since 2010, according to data provider Preqin, with total assets growing to $150.3 billion, shark hunting is under way, or, as Stephen Ketchum, chief executive officer of the $6.5 billion hedge-fund firm Sound Point Capital Management, put it: “There are not any obvious large distressed situations, such as a Caesars or a Lehman Brothers or TXU, coming down the pike…We were comparing Puerto Rico to some of the worst sovereign-debt situations in history, and it just didn’t make sense to us, especially since Puerto Rico is a U.S. territory.” Prices on Puerto Rico’s general obligation bonds plunged to as low as 55 cents on the dollar last July, according to data compiled by Bloomberg, albeit they have since rebounded to about 68 cents, while municipal bonds issued by PREPA reached 33 cents a year ago; these too have recovered to 56 cents. Angelo Gordon, Knighthead, D.E. Shaw & Co. and units of Goldman Sachs Group Inc. are among 11 firms which have agreed to delay a default on nearly $5 billion of PREPA’s debt until tomorrow—in the wake of PREPA’s Monday proposed restructuring plan—a plan some bondholders deemed a basis for further talks, while calling some aspects “unworkable.” So it is, ironically, that capital from the distressed funds or shark funds is currently the fiscal safety net offering borrowed—albeit at prohibitive rates—time in which the current government could act.