A Steepening Road to Municipal Recovery

October 9, 2015

Steeper Road to Recovery—where failure is not an option: U.S. Bankruptcy Judge Meredith Jury yesterday warned San Bernardino that the city will have to produce much more extensive information than the 77-page disclosure statement it has submitted if it is to gain the federal court’s approval of any plan of debt adjustment—the critical hurdle if the city is to emerge from the longest municipal bankruptcy in U.S. history. For the city, which has been attempting to put together its proposed plan of debt adjustment now for a longer period than any other applicant municipality for chapter 9 bankruptcy, the stern warning comes less than a month before looming municipal elections—a hurdle itself—and increases apprehensions about the city’s ability to meet any deadlines—and at what cost. Yesterday’s hearing on the adequacy of the disclosure statement the municipality had filed unsurprisingly drew objections from the city’s multiple creditors, undoubtedly raising further questions with regard to the city’s progress. For instance, the attorney for creditor Ambac Assurance Corp., the company which is the securer for San Bernardino’s $50 million in pension municipal obligation bonds, testified in the courtroom of his apprehensions, noting: “[I]t is pretty clear the city plans to pay unsecured (creditors) the least it can get away with, not the most it can afford…They’re trying to disclose a plan that is fundamentally flawed.”

For her part, Judge Jury raised mayhap a much more fundamental apprehension: can the bankrupt city present the federal court with convincing data and information to demonstrate the city’s proposed plan of debt adjustment would ensure the city would not collapse back into a second bankruptcy in a few years, noting: “I don’t really think it’s in anybody’s objection, but the public perception — the media perception –— of the two cities with confirmed (bankruptcy exit) plans, that being Vallejo and Stockton, is that they’re already in trouble because they didn’t impair CalPERS,” referring to the decision, a proposal also made by San Bernardino, to pay every cent of what the municipality owes to the CalPERS as those costs grow. Judge Jury added: “I don’t think there is adequate discussion of how much those raises are going to be. I have heard other things, I think in this court, that it is an exponentially increasing number that will have to be paid in order to keep retirement plans intact. There comes a point where no matter what I confirm it will fail.” San Bernardino’s actuaries project as part of the bankruptcy exit plan that $29 million a year will go to CalPERS by 2023-24—or an amount more than double its current annual payment. Ergo, for Judge Jury, the grave question is from whence will cometh those funds?

Equally unsurprisingly, San Bernardino’s creditors—all of whom understand that every day further into what has become the longest municipal bankruptcy ever—recognize that each additional day without an approved plan, the less resources remain to be divvied up amongst the city’s thousands of creditors. That apprehension led the attorney for creditor EEPK, a Luxembourg-based bank, which is the holder of San Bernardino’s municipal bonds secured by Ambac, to tell Judge Jury the city needed, in its proposed plan of debt adjustment, to show the value of properties held by the city and why many of them could not be sold to pay creditors—and explain why the city was not pursuing municipal tax increases—reminding the federal court of the critical and daunting fiscal action Stockton’s leadership took to anchor not just its plan of debt adjustment, but also its long-term recovery—or, as he told the court: “The city’s explanation for why it’s not pursuing some substantial potential revenue sources which require voter approval is ‘it would be hard…’ It’s not enough, when you’re paying creditors 1 cent on the dollar, to say ‘It’s hard.’ ” It is difficult to imagine Judge Jury could have emerged from the session with much optimism; nevertheless, she obtained a commitment from the city that it would provide more comprehensive information and responses by the day before Thanksgiving—at which point creditors will respond in writing, leading to still another day—and ever mounting costs—to assess the adequacy of the financial information provided by the city. Judge Jury also informed the parties she is trying to allow San Bernardino to exit bankruptcy as soon as is prudent: “I do intend to keep this pace moving, but not at a pace that is unreasonable.”

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