December 24, 2015. Share on Twitter
Balancing or Imbalancing. U.S. Bankruptcy Judge Meredith Jury yesterday warned San Bernardino’s bankruptcy attorneys they will have to explain why, in the city’s proposed plan of debt adjustment, the city plans to pay some creditors only 1 percent of what they are owed—and why the city cannot raise new or additional revenues to pay for more. The back and forth came as a precursor to what is expected to be San Bernardino’s third and final version of its plan of debt adjustment, which the city expects to file on February 10th. (See:Revised Recovery Plan as submitted to the bankruptcy court on 11/23/15.) In response, City Attorney Gary Saenz, advised Judge Jury he did not expect that to be a problem, as the respective parties gird themselves for the confirmation trial—the last step to San Bernardino’s exit from chapter 9 municipal bankruptcy.
Nevertheless, even as San Bernardino, unlike Detroit, the post-terrorism city in the midst of an election campaign and awaiting a new city manager, can surely expect a multifaceted battle—one waged both by external creditors—such as the owners and insurers of pension obligation bonds, the city must also be responsive to its own citizens, employees, and retirees. As Ron Oliner, an attorney for the San Bernardino Police Officers Association, yesterday noted: “There will be a confirmation fight here. It will be long; it will be bloody; and somebody will be unhappy.”
As hard as the city and its thousands of creditors have negotiated amongst themselves in the seriated versions of the city’s plan, the final gladiators’ battle lies ahead. Or, as Mr. Oliner described it: “The trope — Wall Street versus Main Street — is real in this case,” noting that while some creditors are likely to be held nearly whole—especially in the wake of the terrorist attack, others are likely to receive only one percent of what they are owed. There will likely be no winners, but there will be many significant losers. A sense of the stakes emerged yesterday in the courtroom when Ambac attorney Thomas R. Kreller asked how San Bernardino came up with and how it could continue to contend the most San Bernardino could afford to pay to his clients—as part of its plan of debt adjustment—would be 1 percent of the debt it owes, adding: “We’ve seen shifts not just of tens but of hundreds of millions of dollars…Yet somehow that 1 percent remains in stone.”
Unsurprisingly, as the city has updated and revised the various versions of its proposed plan of debt adjustment, both negotiations with its creditors and external forces have influenced the process. For instance, two of the most significant shifts in the respective versions have been made with regard to increased police staffing and equipment—to which the city is now proposing an increase over the next two decades of $159 million, and the creation of a municipal bankruptcy reserve fund. Indeed, according to City Attorney Saenz, two of the big “shifts” to the plan since May are a plan to increase police staffing and equipment — which the city projects will cost $159 million over 20 years — and $24 million for a bankruptcy reserve fund. Or, as Mr. Saenz said yesterday, after the hearing, any additional money the city acquires has to go to basic city services: “Any dollar we have has to go to addressing our severe service insolvency…I think the creditors’ problem is not so much the amount of information we have produced, but what that information shows: that we don’t have any money to spare.”
The Challenges of Municipal Debt Crises
As the U.S. Treasury, the U.S. Territory of Puerto Rico, and Congress struggle to address the looming Puerto Rico insolvency—and as new House Speaker Rep. Paul Ryan (R-Wisc.) vows a resolution by March, instructing the relevant House Committees with jurisdiction over Puerto Rico before Congress recessed to work with commonwealth officials to come up with a “responsible solution” to the debt crisis by the end of March—there are increasing questions with regard to what Constitutional and legal hurdles exist—questions so serious that it is unclear whether legislation (The Puerto Rico Emergency Financial Stability Act of 2015) introduced by Senate and House Democrats before Congress recessed to temporarily halt litigation over Puerto Rico debt are even constitutional. Indeed, the ever prescient municipal bankruptcy guru Jim Spiotto likened the proposed bills to the moratorium New York State had imposed in 1975 on lawsuits and demands for payment of debt—a moratorium which the Empire State’s highest court reversed two years later, holding that the New York Constitution required debt payments to be made. Under the U.S. Constitution, if the government takes one’s property, that government must pay fair market value—and the Constitution requires due process. Part of the signal problem with barring Puerto Rico access to chapter 9 bankruptcy is that it removes its access to a federal bankruptcy courtroom where there is, in effect, a judicial referee.
In their instruction of the proposed bill in the Senate, the authors stated the purpose was two-fold: first, to “provide a limited period of time to permit Congress to enact comprehensive relief for the commonwealth, providing it the necessary tools to address its economic and fiscal crisis,” and to “provide the commonwealth government with a tool it needs to address an immediate and imminent crisis that is unprecedented in the history of the United States.” The legislation notes that the U.S. commonwealth’s debt is unusually complex with 18 different but inter-related issuers.
Having dilly-dallied for far too long, the growing question is when it might be too late.
December 23, 2015. Share on Twitter
Sharing Fire Services. U.S. District Judge Otis Wright II yesterday, once again, affirmed the City of San Bernardino’s authority to outsource—or share, as it is doing, the provision of fire services. Judge Wright’s decision, similar to that of U.S. Bankruptcy Judge Meredith Jury, who, in her court had previously concluded that nothing in San Bernardino’s city charter or California law prevents the city from sharing services or outsourcing its Fire Department. The proposal to have San Bernardino County assume responsibility for fire and emergency protection is now a “key” part of San Bernardino’s plan of debt adjustment. Indeed, in the wake of the horrific terror killings, the coordination or sharing of essential public safety services in a region demonstrated how invaluable such sharing can be to not just saving fiscal resources—but, more importantly, lives. Thus, the affirmation by the court could mean as much as $11 million towards the city’s pending plan for achieving fiscal sustainability—with as much as $8 million of that coming from a parcel tax that would be implemented as part of the shift.
In his opinion, Judge Wright wrote: “The Court agrees with the bankruptcy court’s determination that (the city charter section) simply empowers the City to establish a fire department; it does not require the City to create a fire department, let alone a fire department staffed by City employees…The Court, on the other hand, concludes that because sections 180 through 186 only govern the operation of an internal fire department once created, those sections simply do not apply if the City chooses to outsource firefighting services.” In its suit, the city’s fire union had relied in part on a 1991 opinion by then-San Bernardino City Attorney James F. Penman in which he had written that the charter prohibited the city from outsourcing police services (and the same provisions used in that opinion existed for firefighting services, too). Judge Wright wryly noted: “This is the fifth appeal taken by the City of San Bernardino’s firefighters in the City’s ongoing bankruptcy saga.”
Juggling & Imbalancing. With U.S. Bankruptcy Judge Meredith Jury convening a status hearing on San Bernardino’s chapter 9 filing today, the court will, no doubt, witness a sharp contrast between the city’s bondholders and insurers, both of whom are criticizing what they describe as San Bernardino’s lack of coherent financial disclosure and the city—one in the midst of grieving in the wake of the first terrorist attack on a U.S. city since 9/11, and in the midst of not only a declared state of emergency, but also a re-election campaign for a city council position, and a series of changes for the absent and departing City Manager (The City Council will discuss a proposal Monday to appoint Police Chief Jarrod Burguan as interim City Manager in January with Mark Scott, currently Burbank’s city manager, taking over as interim in February, according to the agenda.).
In his filing with the federal bankruptcy court, Ambac Assurance Corp. attorney Thomas Kreller noted, referring to the city’s updated disclosure statement: “The revised disclosure statement still falls woefully short of containing the ‘adequate information’ to which creditors are entitled before being asked to vote on the revised plan.” (Ambac is the municipal bond insurer on $50 million in pension obligation bonds held by Erste Europäische Pfandbrief-und Kommunalkreditbank AG, the bondholder.) In their objections, Mr. Kreller questioned how it was that San Bernardino was able to decide on its “draconian” plan of only paying 1% owed on the pension obligation bonds and general unsecured claims when its financial disclosures were so “murky;” while EEPK Attorney Vincent Marriott, III, wrote that San Bernardino had failed to explain an additional $200 million in expenses and reserves mentioned in supplemental filings—with the referenced new items including a $24 million bankruptcy reserve fund, an additional $14 million for police fleet replacement, and $159 million for the “police services master plan.”
Mr. Marriott wrote that despite the “enormous size” of these new spending and reserve items, he said the amended disclosure statement only provided partial or cursory explanations, thereby, leading him to tell the court: “The enormous size of these changes calls into question the validity of the city’s financial projection methodology, and certainly warrant clear disclosure in the body of the amended disclosure statement and significant analysis and explanation by the city,” Marriott wrote in the filing. In fact, San Bernardino’s filing acknowledges that it “provides for substantial impairment of unsecured claims.” Under the proposed plan, holders of $50 million of unsecured pension obligation bond claims would receive payments of $655,000 plus interest over time, with the city’s filing noting: “The city believes that the plan provides the greatest and earliest possible recoveries to holders of claims while preserving necessary city services and operations.” Indeed, the city noted that any alternative debt adjustment or restructuring would result in additional delay, uncertainty, and expense.
One if by land, two if by sea…Standard and Poor, the credit rating agency, continues to keep it eyes on Atlantic City, the city by the sea—and, with a credit watch negative, pending a resolution with regard to Gov. Chris Christie’s conditional vetoes of a rescue package approved by the New Jersey legislature last June—vetoes which, last month, Presidential contender Christie claimed he wanted to be made before he would sign them—without explaining the very long delay in providing feedback. In their analysis, S&P analysts Timothy Little and Lisa R. Schroeer said that the Garden State, in their view, has until the end of the current legislative session to resolve the conditional vetoes and release a long-term plan Atlantic City—meaning sometime in the next three weeks, noting: “Atlantic City’s ability to address its structural imbalance and long-term liabilities has been a significant concern that weighs on its fiscal future…The decision to conditionally veto several bills intended to stabilize the city’s revenues continues to leave the city’s finances in a vulnerable and tenuous position.”
Moody Grading. Moody’s dropped the Windy City’s ailing Chicago Public Schools system, one beset by a cash crisis, one more notch into junk territory, to B1 from Ba3 and reported it would keep the credit under review due to headwinds bearing down on the district over the next 90 days, noting the downgrade reflected “the precarious liquidity position of the district…CPS has increasingly relied on market access and cash flow borrowing to maintain ongoing operations.” The bad credit report card affects $5.5 billion of the CPS’ $6 billion in debt, and followed in the wake of a non-term paper from a CPS consultant earlier this month warning that CPS could exhaust operating cash as soon as next month, making its ability to get a $1 billion sale done and tap a new credit line before then the more urgent. CPS’s CEO Forrest Claypool has warned of major layoffs if the state, itself a fiscally failing state in disarray, does not provide the requested assistance. However, CPS’ problems remain far from the top of the card in faraway Springfield, where a feud between the legislature’s majority Democrats and Republican Gov. Bruce Rauner has left the state without a budget for nearly half a year. Moreover, even though Gov. Rauner did sign school aid appropriations, grant funding of $150 million has been delayed. CPS could realize another misfortune as early as February now that Chicago teachers have given their union authorization to pursue a strike, which could occur as soon as late February if a new contract cannot be brokered. Indeed, there appears, increasingly, a risk of a kind of fiscal whirlpool, or as the ever prescient Chicago vet, Richard Ciccarone, president at Merritt Research Services, noted: “Doing a billion dollar financing won’t be easy even with the help of yield-hungry investors. How they structure the security will matter a lot.”
Free at Last! Perhaps it is appropriate that for the first time in a decade and a half, no city in Michigan is under the state’s emergency financial management, leading Michigan Governor Rick Snyder yesterday to note: “This is a great day, not only for the City of Lincoln Park, but for the entire State of Michigan.” In his statement, Gov. Snyder praised the leadership of Emergency Manager Brad Coulter, who the Gov. had designated as the EM in July of 2014: “Brad has provided a shining example of how the system can work; first, collaborating with local leaders to address the city’s financial emergency, then working to enhance economic development to help ensure continued financial stability for Lincoln Park.” Lincoln Park, a municipality of 38,000, is one of 34 cities and 9 townships in Wayne County—the county which includes Detroit, and was, itself, on the verge of bankruptcy. The successful exit yesterday means that the state’s fiscal emergency oversight is now narrowed to three school districts: Detroit, Muskegon Heights, and Highland Park.
In the case of Lincoln Park, the path to fiscal solvency was through renegotiated city employee contracts, the elimination of employees’ ability to purchase years’ towards pension service, and the elimination of post-retirement health care benefits and Medicare Part B reimbursements. The agreement also eliminated cash for unused sick days when an employee leaves employment with the municipality. The results are like a pre-wrapped Christmas gift: Mr. Coulter departs, leaving behind a two-year budget, and a surplus of nearly $187,000—a stunning turnaround from the more than $1 million general fund deficit he started with at his appointment—or, as City Councilman Elliott Zelenak said yesterday: “Regardless if I was with him 100 percent of the time or not, I do think he did what was best for the city, what his job was asked for…He had a tough job and I think he did his job really well.” Mayor Thomas Karnes said Lincoln Park leaders and officials worked closely with Mr. Coulter to ensure Lincoln Park regained its financial footing. Now that the city “is in better shape now than it was when he came in,” Mayor Karnes said, the goal is to continue that course while moving forward with more direct oversight: “The people of Lincoln Park elected us to represent them and to lead their government, so I’d like to get back to doing that…I want everybody to know we’re ready to take the helm again and are looking forward to it.” At the height of the economic downturn, Lincoln Park lost one-third of its property tax revenue. It could take, Mr. Coulter noted, require “a good 10 years” before property values return to what they once were.