Balancing Power & Authority in Municipal Debt Restructuring

February 9, 2016. Share on Twitter

Spinning the Wheel in Atlantic City. In what Atlantic City Mayor Don Guardian warned could be a “devastating” fiscal blow to the city—already nearing running out of cash, the Borgata casino has notified the city it will stop making tax payments until the city turns over $62.5 million in court-ordered tax refunds. The tax payment is due next week, but is less than a third of what the city owes to the Borgata on tax appeals–appeals that the casino won by challenging the city’s property tax assessment—assessments that have diverged from actual values as the famed city’s gaming resorts have been challenged by increasing competition in the Northeast. The casino’s warning to the city came shortly after Superior Court Judge Julio Mendez granted a motion last Friday declaring that Atlantic City must pay the casino $62.5 million for tax years 2009-10 — payments that have already been ordered and upheld by previous court rulings, but not yet made. Judge Mendez provided a little leeway: in his ruling, he barred the casino from moving to seize any of Atlantic City’s assets to collect the judgment for at least 45 days in order to allow settlement talks; however, he permitted Borgata to stop making its current tax payments while the case remains unresolved.

The non-payment, according to Mayor Guardian, could force Atlantic City into municipal bankruptcy: he said he would try to enter into mediation with the casino’s owners and the state with regard to the unpaid debt, and expressed appreciation that Judge Mendez had temporarily barred the casino from going after the city’s assets: “Although there is no doubt that we owe Borgata money back from prior rulings, the question has always been how do we pay them back fair and reasonably given our current fiscal constraints?…Having Borgata exercise the option not to pay their first quarter taxes would be devastating to Atlantic City.” For its part, the casino’s owner noted the casino remains willing to negotiate with Atlantic City and the State of New Jersey in its oversight role of Atlantic City; however, he noted Atlantic City has yet to make a serious offer. In addition to the $62.5 million it is owed for tax years 2009-10, the Borgata reached a settlement with the city for tax years 2011-14 of $88.25 million, which was supposed to be paid by Dec. 31st of 2014. It was not. Both sides have continued to talk, but no agreement has been reached. Borgata’s general counsel, Joe Corbo, noted: “We did not come to this decision lightly…We have been tremendously patient, giving city officials every opportunity to pay the amounts we are owed, or to engage us in good-faith negotiations. But after years of delays and unsuccessful appeals by the city, we can wait no longer. We have a fiduciary duty to the shareholders of our parent companies to pursue collection of the amount we are owed, which currently stands at over $170 million with interest.”

Puerto Rico in the Twilight Zone. The U.S. House Natural Resources Committee House committee has scheduled a February 25th hearing at which Treasury Counselor Antonio Weiss has been asked to discuss an analysis of Puerto Rico, as the House presses to meet House Speaker Paul Ryan’s deadline of April 1st for the House to complete and send legislation to the Senate, with a focus on legislation authored by Rep. Sean Duffy (R-Wisc.) which would give the U.S. territory some sort of access to bankruptcy—as well as impose a financial stability council. Treasury Counselor Weiss last Friday, at a panel sponsored by the Bipartisan Policy Center, reported there have been “very positive discussions taking place on both sides of the aisle” in Congress, adding that there now seems to be greater agreement that any Congressional plan to help Puerto Rico avoid default and insolvency should include both restructuring and oversight. In his presentation last week, Mr. Weiss said the administration believes that restructuring of Puerto Rico’s debt could come through the Constitution’s Territorial Clause instead of through an addition to the U.S. bankruptcy code. The clause in question reads: “Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.”) Mr. Weiss added that not all the territory’s debt would have to “be treated with a broad brush equally,” and that restructuring could take into account the many differences between Puerto Rico’s various debts, noting: “A special legislative act is required, tailored to the territories, consistent with Article 4 of the Constitution and that is neither for cities nor for states…It is on Congress recognizing the severity of this problem to agree in a bipartisan fashion on what those tools should be. It’s emergency legislation to deal with an emergency situation.”

Resident Commissioner Pedro Pierluisi, Puerto Rico’s sole representative in Congress, noted, in response to the emerging resolution, that he and other elected Puerto Rican leaders are concerned that any Congressional action not create a federal oversight authority that would impose too much control over the island’s municipalities: he said he would support an oversight authority as long as it respected Puerto Rico’s local governance, something both Republicans and Democrats have agreed is important to a final bill.

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