Caught between Governance, Democracy, and Municipal Bankruptcy

August 3, 2015

Aching for a Fiscally Sustainable Tomorrow. Saturday marked the third anniversary of San Bernardino’s municipal bankruptcy filing—making it not only the longest period of any city in such a transition, but also a time of considerable public disruption. Because, in California, unlike Michigan or in a number of other states which authorize municipal bankruptcy, municipal elected officials remain in charge; only in the case of San Bernardino, even there—unlike Jefferson County—there has been significant change—a new Mayor, City Council, and City Attorney. Now even more could well be on the way. Candidates for the Third, Fifth, Sixth, and Seventh Ward Council Member positions, as well as for City Attorney, City Treasurer, and City Clerk, must file for election or re-election next November by the end of this week. For the bankrupt city’s voters and taxpayers, moreover, there is a tenuous balance between local control and the federal court. Almost as if in a twilight zone in a most disinterested state, San Bernardino is suspended not just in a time warp, but also in uncertainty as to critical decisions which will emerge not from their own elected leaders, but also U.S. Bankruptcy Judge Meredith Jury. That is, the city’s elected officials (and prospective challengers) bear not only their responsibility to their constituents and taxpayers, but also to be responsive to the federal court. Unsurprisingly, what might satisfy the federal bankruptcy court is less than likely to meet with citizens’/taxpayers’ hopes. Mayor Carey Davis provided his perspective: “I think there’s a fair amount of frustration on the part of residents with the protracted nature of this, but (bankruptcy) is a long and expensive process to move through…A lot of residents, I find, are surprised, because they saw filing the Plan of Adjustment as a completion. It required a considerable amount of effort to put together that Plan of Adjustment, and so the implementation of that, I think, is going to take just as much work — and I think it will be the most difficult time of the bankruptcy.” One of the terrible ironies of municipal bankruptcy is that a municipality that cannot meet its fiscal obligations is, after all, beset with very significant costs in bankruptcy: as of last February, San Bernardino had already more than doubled its budgeted costs for the municipal bankruptcy process from $4.1 to $9.3 million.

Pop Goes the Weasel. Sort of like the musical chairs game we played as kids, where when the music stopped—and one chair had been removed—someone was out. What is different is that in the case of Puerto Rico, with default now happening, and Puerto Rico’s government having suspended setting aside funds to meet its general obligation debt, the issue is rather which creditors will not be paid—especially in the wake of the Puerto Rico’s Treasury announcing that the government was not making the set asides—or, as Puerto Rico Secretary of the Treasury Juan Zaragoza put it in an interview: “We aren’t making the monthly deposits. But that does not mean in any way that we won’t pay our GO obligations.” Of course, it does not mean Puerto Rico will. As of today, the U.S. territory has moved into a fiscal Twilight Zone. Under legislation Governor Alejandro García Padilla signed, Puerto Rico is authorized to suspend set asides as long as it finds itself unable to borrow some $1.2 billion in intra-year funding or the Puerto Rico Infrastructure and Finance Authority cannot sell a $2.9 billion gas-tax supported bond. So, now the island—and its creditors—find themselves in a brave new fiscal world where—outside of municipal bankruptcy—there are few prescribed rules; moreover, unable to access federal bankruptcy, there is no federal bankruptcy judge to either ensure the protection of essential public services, much less to act as a referee amongst the clamoring creditors. Puerto Rico’s constitution prioritizes the payment of its guaranteed debt over any other financial need. The approved fiscal year 2015-2016 General Fund budget allocated $1.011 billion for general obligation debt, and a Treasury spokeswoman on Friday confirmed that the Government Development Bank had transferred about $170 million to the bond trustee for payments of its debts today.

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