Essential Public Services

July 8, 2015

Essential Public Services. A key purpose of chapter 9 municipal bankruptcy is to ensure that a city or county can continue to provide essential services. While that reads well, it is more difficult in practice—so it is that in the midst of a searing drought the second of San Bernardino’s fire stations has been unstaffed since July 1st, and will likely remain unstaffed until new firefighters are available in August; similarly, the paramedics at Station 223, which had previously been “browned out,” or temporarily closed, is without city personnel, as is Station 230—which has been closed for budget reasons since last October. There are multiple constraints, including the expiration of a FEMA grant affecting 9 firefighters; the city is increasingly unable to attract new firefighters, because of its bankruptcy status, its lack of competitiveness in compensation (San Bernardino pays about 8-10 percent less than its surrounding neighbors), and its proposal in its plan of debt adjustment pending before the U.S. Bankruptcy Court to, increasingly, contract out; and the city simply lacks the fiscal resources to compete in the hiring markets. Citing a lack of stability and a perceived lack of respect from city officials, firefighters have been leaving the city in record numbers this year. In May, when 10 had left for jobs with other agencies, that was more than the previous four years combined, and more than triple the average for 2005-2014. The situation has reached what City Manager Allen Parker reports to be a situation “bordering on a crisis,” noting he understands that at one point the growing dearth of firefighters had recently forced the closure of four stations at a single time. San Bernardino currently has 20 vacancies in the Fire Department—but reports it now has 14 ready to be hired, and to commence training; yet, unsurprisingly, 9-1-1 response times remain slower than the industry standard. Response times, of course, can sometimes demarcate the difference between life and death. The dearth of firefighters is creating a separate policy issue for the City Council: which station or stations to close? Councilmember John Valdivia, who last year was outvoted when the Council provided authority for stations to be closed, believes it is unfair to always close one station, especially in this instance where he believes the station most affected happens to serve a particularly poor, minority neighborhood. The life and death choices have been further complicated by San Bernardino’s charter, which mandates that salaries for firefighters be raised to the average of 10 like-sized cities—a critical factor in the bankrupt city’s 4-3 vote Monday evening to provide an increase of $500,000 in base pay, overtime, and pension benefits. San Bernardino is trying to contract out fire services, as part of its plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury, claiming the move, if approved, could achieve $7 million to $10 million in savings.

Is Puerto Rico Being Held Up? A U.S. Court of Appeals yesterday rejected the U.S. Territory’s effort to overturn the lower court’s rejection of its restructuring law (Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 15-1218, U.S. Court of Appeals for the First Circuit), adding further pressure on Congress to act on options to ensure Puerto Rico is able to continue to provide essential public services as it nears insolvency. Writing for the majority, Judge Sandra Lynch wrote: “Congress preserved to itself that power to authorize Puerto Rican municipalities to seek Chapter 9 relief.” In his concurring opinion, Judge Juan Torruella wrote there was no legislative basis for not allowing Puerto Rico public entities from seeking Chapter 9 relief: “A tracing of its travels through the halls of Congress sheds less light than a piece of coal on a moonless night regarding the reason for its enactment. Thus, the majority’s statement that ‘Congress [sought to] preserve to itself th[e] power to authorize Puerto Rican municipalities to seek Chapter 9 relief’, is pure fiction.” Nevertheless, the decision found the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, enacted last year to allow the territory’s cash-strapped public utilities to restructure, is not valid and cannot be implemented because of the lack of bondholder consent, in effect giving a victory in favor of two groups of holders of nearly $2 billion of PREPA bonds — Franklin California Tax-Free Trust and BlueMountain Capital Management, with the court affirming the lower court’s holding that Puerto Rico’s recovery law violates §903(1) of the U.S. bankruptcy code, which prohibits states from passing laws that would allow their public entities to restructure without the approval of those entities’ creditors. The court, interestingly, wrote that the commonwealth is considered a state under bankruptcy law even though it was deemed ineligible for filing for bankruptcy protection under Chapter 9 in amendments to the bankruptcy code enacted in 1984. That opinion contrasted with Puerto Rico’s attorneys, who had argued that the U.S. territory is in a “no man’s land,” because it is not a state, and, therefore, ineligible for chapter 9 bankruptcy protection to ensure continuity of vital services and protection from creditors. The decision had the effect of rejecting the Puerto Rican statute which would have permitted the territory to adopt chapter 9-like provisions so that its municipalities and public agencies could seek protection from creditors. Puerto Rico Attorney General Cesar Miranda Rodriguez said Puerto Rico may appeal to the U.S. Supreme Court, noting that, in his view: “It’s arbitrary and inconceivable that Puerto Rico will be deprived of a tool that allows for an orderly negotiation of public debt.” Absent either a Supreme Court reversal or action by Congress, Puerto Rico confronts a free-for-all. In contrast, lawyers representing hedge funds and municipal bondholders claimed that Congress has not permitted Puerto Rico to create its own bankruptcy laws.

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