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In this morning’s eBlog, we continue to follow Atlantic City’s blues—and the racing deadline the city faces in the midst of uneven state leadership—but remarkable state power and authority over the city—all without, however, any obligation to provide fiscal assistance. We continue to follow the unprecedented leadership efforts of House Speaker Paul Ryan and House Natural Resources Committee Chair Rob Bishop in their efforts to coordinate with U.S. Treasury officials to address the nearing insolvency in Puerto Rico—mayhap with insolvency looming at the same time as in Puerto Rico. We look back at the test of time since former President Reagan signed the 1988 municipal bankruptcy amendments into law: how has it worked? How has it balanced municipal public pension obligations versus a municipality’s bondholder obligations—and with what potential consequences for a city’s future? As we head down this morning to the Southern Municipal Conference in Norfolk, this seems like a lot to ponder upon.
Atlantic City Blues. New Jersey’s key state legislative leaders met privately yesterday to discuss their competing options for helping Atlantic City avoid insolvency and municipal bankruptcy, but were unable to reach any agreement: the city is beset by the closure of four casinos in recent years; it has about a $100 million budget deficit; and it is more than $550 million in debt. The closure of the casinos and drop in the assessed values of the remaining properties have combined to reduce the city’s property tax base by more than 50 percent in the past five years—forcing it under State supervision pursuant to the Local Government Supervision Act. However, notwithstanding State supervision and imposition of Emergency Manager Kevin Lavin, Atlantic City currently faces a revenue shortfall that could render the municipality insolvent in the near future. Added to the governance challenge, according to an analysis last week by the state’s Office of Legislative Services, there is no New Jersey statute which obligates the State to financially assist Atlantic City in case of an imminent default on its municipal debts—an opinion confirmed by the fact that the State is not listed on the bond covenants as a guarantor; rather the state law pledges the taxing authority of the municipality alone to “pay the interest on bonds issued.” The opinion notes, however, that under the state law: “Once a municipality is under State supervision, the Local Finance Board may impose certain restrictions on the city, including limitation on debt and limitations on expenditures.” The epistle adds that the state has “broad authority to order the city to liquidate or refinance its current debts, and, if the city does not comply with those orders, the Local Finance Board may perform those actions itself or through its agents.” Finally, the letter notes that while the state statute directs the state to “extend all possible consultation and assistance to municipalities,” the state is “not aware of any interpretation of that statute that requires the assistance to be in the nature of state aid or the assumption of the city’s debts.” The letter confirms that not only does the state regard itself under no obligation to help, but that any such help is unlikely.
Similarly, in the wake yesterday of an hour-long discussion between New Jersey Assembly Speaker Vincent Prieto and Senate President Stephen Sweeney, the two reported no progress had been made and stressed that there is now increasing apprehension the city is headed toward insolvency, with President Sweeney noting: “I think we’re going to face bankruptcy…I’m very concerned what’s going to happen to other communities because of this.” It appears the Speaker recognizes the potential for contagion: Atlantic City defaults on its debt or filing for chapter 9 municipal bankruptcy could trigger downgrades to the credit ratings of other municipalities across New Jersey.
For its part, in the wake of Tuesday’s rejection by a New Jersey Superior Court judge of a state request to freeze Atlantic City’s spending until the city makes all the payments it owes to its school district over the next three months, the city turned the tables by filing a counter lawsuit demanding the state pay the city with $33.5 million in aid — funds which local leaders say they were promised, but which Gov. Chris Christie vetoed in January. In addition, the city is requesting the court to designate a special master to be appointed to oversee the state monitor the Christie administration placed in city hall six years ago to oversee the city’s finances—or, as Atlantic City Council President described it: “We have to fight back…We believe to balance this thing out, we have to go in front of a judge. The facts will play themselves out in our favor.” In addition, the suit calls for the state to hand over key documents related to the quasi-state takeover, including the report filed by the Governor’s appointed emergency manager—and that the court bar the state from taking any “punitive, retributive, or adverse action against the city of Atlantic City.”
Meanwhile in Trenton, State Senate President Sweeney has been pushing a plan backed by the Governor which includes an aid package for the city and a bill that would allow a five-year takeover of many city functions—even as in the House, House Speaker Vincent Prieto has announced his own rescue bill—noting, with its introduction yesterday—“Atlantic City needs help…but they need to be treated fairly.” The action came as Sen. Sweeney said he had offered a second compromise in private yesterday, although a spokesperson for Speaker Prieto said no such offer was made. Gov. Christie added in what might herald the commencement of a “blame game” that Speaker Prieto “is going to be responsible for the bankruptcy of Atlantic City.” Sen. Sweeney noted that the Speaker “doesn’t feel Atlantic City can go bankrupt,” because he believes the state is required under law to step in. Senate President Sweeney, however, noted that “Nowhere does it say the state has to write a check,” a position seemingly supported by a different analysis from the state’s Office of Legislative Services—albeit that opinion does note that under New Jersey law, when a municipality defaults for more than 60 days on outstanding notes or bonds, the court “shall require the state to exercise its powers and duties to stave off bankruptcy.”
Maybe A Little Good Gnus. Meanwhile, Atlantic County Superior Court Judge Julio Mendez has ruled that Atlantic City is in compliance with payments owed to its school district, a judge has ruled, denying the state’s request that Atlantic City be forced to freeze spending until outstanding property tax payments owed to its school district through June 30 are paid. The city made an $8.4 million payment to the public schools on Tuesday and needs to pay an additional $25 million over the next two months. In the wake of Judge Mendez’s ruling, Atlantic City announced a counterclaim against New Jersey demanding it provide $33.5 million in aid that had been approved by a state monitor for the FY2015 budget—funds to be derived from a bill in the state legislature vetoed by Gov. Chris Christie that would have enabled the city’s eight casinos to make payments-in-lieu-of-taxes for 10 years—legislation the Governor has said he will not sign without an approval of legislation enabling a state takeover that would empower New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years.
Puerto Rico. Congress seems increasingly unlikely to take action to help Puerto Rico ahead of a May Day deadline for the Commonwealth to default on a nearly half-billion-dollar debt payment—a failure to act which could push Puerto Rico and its 3.5 million American citizens further into crisis, exacerbating not only a growing fiscal crisis, but also a potential humanitarian disaster—after House Natural Resource Committee Chairman Rob Bishop (R-Utah) was forced to abruptly cancel a vote on a Puerto Rico debt restructuring bill when it was short of votes last week. A revised version is not yet completed, although Chairman Bishop warned that: “I’m not sure that on May 2 Armageddon takes place, but clearly I think it will illustrate that there is a significant problem…There are still some people out there saying there’s not a problem…No, there is a problem, they will default on some portion.” The Chairman’s draft proposal would create a create a financial control board, not unlike comparable boards that were used to avert bankruptcies in New York City and Washington, D.C., to manage the U.S. territory. Now it appears committee action is unlikely before next week at earliest, risking chances of final passage through the House and the Senate before the end of next week.
Can Municipal Bankruptcy Work? Notwithstanding the naysayers on Capitol Hill, not to mention the deep apprehensions we had (and strong opposition from leaders in the National League of Cities) to the municipal bankruptcy amendments President Reagan signed into law in 1988, nor the significant string of municipal bankruptcies in Jefferson County, Central Falls, Stockton, San Bernardino, but, perhaps most of all, Detroit—where I met with Kevyn Orr, the state’s selected emergency manager, on the morning he filed for the historic city of soul to go into municipal bankruptcy—a city which had suffered not only criminal malfeasance from its own elected leaders, but also devastation by the Great Recession of its iconic auto industry—devastation of economic destruction and population loss so deep that it made one apprehensive that it could ever recover. Yet, today, in the wake of extraordinary leadership by a federal bankruptcy judge and his partner from a U.S. District court, and thanks in no small part to a $100 million pledge from JP Morgan Chase—a commitment that has leveraged, according to Mayor Mike Duggan, another $30 million, and dynamic leadership by the Mayor, the city is on the brink of a sparkling new bridge to Canada that could make Detroit a gateway over the years towards a recovery which only four years’ ago seemed almost unthinkable.
Future versus the Past? Notwithstanding phony claims by some Members of Congress that any form of municipal bankruptcy would amount to a federal bailout of Puerto Rico, municipal bankruptcy means on its face that there will be losers. Just think, Judge Steven Rhodes in Detroit had to opine over the city’s plan of debt adjustment with regard to how its assets would be divvied up between more than 100,000 creditors. His decision was further complicated by Michigan’s constitution, which protects contracts—contracts such as Detroit’s pension obligations. Unlike a non-municipal corporation, the importance of chapter 9 is to insure there is no disruption of essential municipal services; there are, however, exceptionally hard choices forced with regard to such cities’ municipal bondholders and retirees. The latter, after all, are taxpayers to the city—and steep cuts in pension obligations might make them wards of the city. In contrast, bondholders are spread all across the country: they are often neither constituents, nor voters. Yet, they are vital to any enduring fiscal and economic recovery. So, as Bloomberg this week wrote: [municipal] bondholders have reason to fear a fight in a federal bankruptcy court if an insolvent municipality or county files, because, as the piece noted: “recent cases show that when municipalities go broke, investors lose when pitted against municipal retirees,” adding, for instance, that San Bernardino’s proposed plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury provides for a 60 percent loss to the city’s municipal bondholders, but retains retirement benefits intact under the settlement which could pave the way for the terror-stricken municipality to exit nearly four years in municipal bankruptcy—the longest of any city in history. According to Black Rock Inc., the outcome in San Bernardino shows why municipal bondholders should be wary of distressed local governments which can petition to have debts reduced in federal bankruptcy courts, because, Peter Hayes, BlackRock’s head of municipal bonds, notes: “Pensions are faring far better than other creditors under Chapter 9…This reinforces the view that bondholders need to be extremely cautious dealing with distressed municipalities.”