Post Bankruptcy Fiscal Discipline

July 24, 2015

Taking on Fiscal Sustainability. The Detroit News’ insightful columnist Daniel Howes yesterday wrote that Detroit Mayor Mike Duggan’s “readiness to challenge professional fees associated with Detroit’s historic bankruptcy is paying dividends,” noting that those astute challenges had already resulted in some $30 million in reduced borrowing needs, or, as Mayor Duggan’s deputy chief of staff reported: “It’s hugely helpful: For those years the debt service is reduced in principal and interest, you have that much more you can provide in services.” Mr. Howes added: “That’s not all. As part of its expected refinancing in the municipal bond market (the same market that experts predicted would spurn Detroit’s post-Chapter 9 borrowing efforts), the city also plans to restructure repayment schedules to eliminate what would have been larger payments in future years.” That is to note that the kind of fiscal discipline emerging in post-bankrupt Detroit is providing for not just more disciplined financial certainty and disciplined budgets, but also more fiscal resources to support delivery of basic public services—or, as Mr. Howes wrote: “an improved financial profile that could be reflected in credit ratings upgrades, perhaps as early as this week,” adding: “That’s in Detroit, little more than six months after completing the largest municipal bankruptcy in American history. That’s in record time and in a largely consensual proceeding that, for the first time in a very long time, also produced collective bargaining agreements with all the city’s unions.”

July 23, 2015

Financial Emergency. Michigan Gov. Rick Snyder yesterday affirmed the conclusion of the state’s five-member independent review team and declared a financial emergency in Wayne County, stating: “Local leaders have taken important steps toward resolving the financial crisis that has challenged the county for several years, but the review team’s report clearly shows that a financial emergency exists…Chronic financial crises will only grow worse, and the possible solutions will be far more difficult, if the crisis is not addressed immediately. Restoring Wayne County to a secure financial foundation will ensure residents will continue to get the services they need.” In a statement issued after Gov. Snyder’s declaration, Wayne County Executive Warren Evans said the Governor’s decision confirms the county’s own findings of an emergency: “We maintain the position that a consent agreement is the best option going forward…We will seek a consent agreement that respects the roles of the Wayne County executive and commission, and gives us the tools to focus our efforts on resolving the $52 million structural deficit.” County commissioners eventually can vote for one of four options for state intervention: a consent agreement, which sets benchmarks the county would have to accomplish; mediation; an emergency manager; or Chapter 9 bankruptcy. Wayne County is struggling with a $52 million structural deficit. The recurring shortfall in Michigan’s most populous county, which encompasses Detroit, stems from the underfunded pension system and a $100 million yearly drop in property tax revenue since 2008. Its accumulated deficit is $150 million. County leaders have until 5 p.m. July 29th to request a hearing on the Governor’s determination.

Impago is the word in Spanish for default, which Moody’s late yesterday opined the probability of to be approaching 100% for the U.S. territory of Puerto Rico, adding that the losses given default will be substantial: “We assume the commonwealth will seek to restructure its debt in a consolidate fashion, affecting all [municipal] bondholders to varying degrees.” The rating agency added the federal government is unlikely to bail out Puerto Rico—and that bankruptcy would not be a viable solution, adding that “any effort by the federal government on the commonwealth’s behalf would have marginal near-term effects.” In its report, Moody’s noted: “The federal government does not provide states or local governments with extraordinary funds to avert defaults on their debt, in part because doing so would induce other governments to take on unsustainable amounts of debt or engage in reckless fiscal practices.” The agency did not note that the federal government, in contrast, does provide extraordinary funds to other kinds of corporations on Wall Street and in Detroit—just not municipalities, U.S. territories, or states. In the Q&A from Moody’s VP and Senior Credit Officer Ted Hampton, Moody’s also downplayed the efficacy of chapter 9 municipal bankruptcy to help: “Since Chapter 9 is unlikely to be a viable way to achieve a consolidated restructuring of all the commonwealth’s debt, bankruptcy authorization would not be sufficient by itself to manage Puerto Rico’s current pressures…A bankruptcy filing might provide for a more orderly process with comparatively better recovery rates for a subset of bondholders, excluding direct debt of the central government as well as public corporations unable to show insolvency.” The very high likelihood that Puerto Rico will default and significantly restructure its obligations affecting all of its bondholders to varying degrees, provokes questions about expectations for bondholder recoveries, so that Moody’s added: “We believe bondholder recoveries will be lowest on securities lacking explicit contractual or other legal protections. These securities consist of those rated Ca, including notes issued by the Government Development Bank for Puerto Rico (GDB, Ca negative) and the commonwealth’s subject-to-appropriation debt.” Moody’s noted that Congress, should it not opt—as appears more likely than not—to authorize the U.S. territory access to municipal bankruptcy, could take action to support Puerto Rico besides giving it the ability to use the U.S. Bankruptcy Code, such as through the appointment of a federal financial control board or amendments to the Jones Act, which mandates Puerto Rico use expensive U.S. ships for shipping activities. The rating agency, in its grim outlook, noted that Puerto Rico’s fiscal situation will continue to deteriorate, because the island “lacks an obvious engine of recovery” and faces a continually contracting economy with longstanding immigration away from the island leading to a labor force participation rate of 40% compared to the continental U.S. overall participation rate of 63%.

Waiting for Godot. Meanwhile the U.S. Treasury Department has remained firm that it will not pursue a bailout; it will defer to Congress with regard to any federal response to Congress. Both the House and Senate have bills pending that would allow Puerto Rico’s municipalities and public corporations to seek bankruptcy protection under Chapter 9, an avenue afforded in states, but there has been no progress to date—and with Congress scheduled to go on vacation at the end of next week and not return until September 8th, likely past when Puerto Rico will have a default, the chances of Congressional action appears more and more unlikely. The bill in the House was introduced in February and has been sitting in a subcommittee of the House Judiciary Committee since March. The bill in the Senate, introduced last week, was referred to the Senate Judiciary Committee where it appears to have gained no traction.

Surf’s Up. Meanwhile, Moody’s is decidedly less moody about Atlantic City, which reports it has sufficient cash to meet its August general obligation debt service payments and expects to have sufficient liquidity through October: Revenue & Finance Department Director Michael Stinson reports that Atlantic City has roughly $30 million in cash, which will enable it to cover debt service payments of $3.5 million due this Saturday, and $2.5 million on August 15th–a $12.3 million short-term maturity due next Tuesday will be covered by proceeds from a May sale of state-enhanced bonds. In fact, Director Stinson said Atlantic City has enough cash to meet its needs until Nov. 1st if third-quarter property taxes are collected on schedule—a schedule he fully expects the city to meet—or, as he puts it: “We are moving in a positive direction.” Indeed, Moody’s on Monday issued a report writing that Atlantic City’s ability to meet August payments is a credit positive since it has been able to raise sufficient cash for debt service while continuing to seek long-term solutions for confronting financial challenges. The credit rating agency had downgraded Atlantic City six notches to Caa1 last January in the wake of Gov. Chris Christie’s decision to place the city under emergency manager control. Josellyn Yousef, Moody’s analyst, noted the factors which will determine the future of Atlantic City’s financial stability include whether Gov.—and now Presidential candidate–Christie signs legislation adopting a rescue package for the city (The rescue package awaiting Gov. Christie’s signature would create a payment in lieu of taxes program for casinos which would eliminate the risk of future tax appeals.), a timely adoption of a balanced 2015 budget and manageable settlements on casino tax appeal refunds. The rating agency added that the shuttered Revel casino, delinquent on some $32 million of 2014 property taxes, is current on its bills owed to the city so far in 2015, adding stability to Atlantic City’s 2015 cash flow. Ms. Yousef noted that the future of tax-appeal refunds to casinos will play an especially important role in Atlantic City’s turnaround efforts, adding that a solution must be found soon, adding: “A lengthy, expensive litigation battle with casinos would significantly strain city finances, conceivably driving the city into bankruptcy: The city needs the casinos’ cooperation to work out a solution for the nearly $200 million of tax appeal refunds it owes them, $153 million of which must be paid to the Borgata casino alone. The liability to casinos approaches the city’s $270 million of GO debt.” The Garden State city is facing a $101 million budget gap; it was hit hard by four casino closures last year—closures which costs hundreds and hundreds of jobs and a significant hit to property tax receipts and assessed property values. Ms. Yousef said the city must mail fourth-quarter tax bills by the end of September to allow sufficient time for an accelerated tax lien sale before the end of 2015, which allow the city to collect unpaid property taxes, warning that a delay past October would likely postpone property tax collections and “strain liquidity” when an $11 million debt service is due in December.

“A Greek Tragedy in Houston.” Don Hooper, who is an oil and gas executive based in Houston, writing for Big Jolly Politics, this week wrote that “the reality of the City of Houston’s financial condition will continue to be glossed over by city leaders. Only recently did the city’s finance director announce that the city is out of magic tricks. They have sold every city asset with any value and these one-time cash infusions used to balance the city budget are over. It took us a few years to get here; but, I am now of the opinion that it is time to file for bankruptcy.” Writing that he had recently listened to a recent city budget debate at city hall—a debate during which the mayor castigated a Councilmember for daring to mention the “B” word – bankruptcy. The mayor said that she worried his comments could hurt the city’s credit rating, adding: “The pitiful financial state of the city is no secret. Anyone buying our bonds needs to have their head examined. A few years ago, we could have turned the corner, put responsible adults in charge, and attempted to rein in the city’s spending; but, we are way past that now. Houston is Greece.” As in other cities, the challenge is fiscal sustainability: how can the city address its long-term fiscal obligations? Mr. Hooper notes: “During the ‘special’ city council meeting called by three council members to discuss a firefighter union settlement, council member Jerry Davis suggested that, ‘We will just raise taxes to fix the debt problem.’ Senator Paul Bettencourt laughed and pointed to the facts: property taxes would have to be increased by fifty percent for ten years to pay off our current pension debt, assuming the city did not spend another dime.’” Then he wrote: “All city politicians are against bankruptcy, because they want to control the piggy bank. Filing for bankruptcy now allows us to regain control of our city after years of reckless spending, cuts off reckless spending, and allows us to renegotiate our union contracts. A Federal Bankruptcy Judge, responsible adult, would be making spending decisions…Politicians, bond lawyers, financial consultants, investment bankers, and municipal securities brokers have created a heck of a mess. Who is going to get us out? The answer begins with the “B” word – file for bankruptcy now.”

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