Have the Die Rolled in Atlantic City? What might we learn from Maywood, & Fine insights about the fate of Puerto Rico.

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eBlog, 5/15/16
In this morning’s eBlog, we wonder if the end game is nearing in Atlantic City. We observe the ongoing amazing recover in the Detroit metropolitan region. We observe the seeming imminent dissolution or municipal bankruptcy in the very small city of Maywood, California. And we note the always acerbic Joe Mysak’s astute observations with regard to Puerto Rico.

Have the Die Rolled in Atlantic City? The intergovernmental, inter-party confrontation in the New Jersey Legislature over the fiscal fate of Atlantic City appears nearly over, with Senate President Steve Sweeney gaining the edge over Speaker Vince Prieto. Under the emerging agreement, the state will offer Atlantic City a grace period of just 150 days to cut its $260 million budget by half—or have the state intervene and take over under the auspices of the director of the state Local Finance Board—virtually the same as Senate President Sweeney had insisted. Under the agreement, public union contracts would still be immediately designated for cuts and alterations, the long-delayed payment in lieu of taxes agreement with the city’s remaining casinos would still accompany the legislation as its own bill, and city assets would still be handed over to the Local Finance Board if the city failed to make the state mandated cuts. While the agreement reduces the Damocles Sword threat of an immediate state takeover, the Herculean task of such deep cuts in less than half of year make it appear more to be simply a countdown clock to a takeover, albeit Atlantic City Mayor Don Guardian responded: “The period of time for us to be able come up with the plan — very reasonable: The one year till the end of 2017 to actually implement that plan — I think that’s tough but also reasonable. The question is going to be the dollar value.” Translated, the Mayor said that chopping the city’s budget by half was an “impossibility,” but if the herculean task is possible, he added: “I’m going to get it done,” adding that the city’s budget is already down to $225 million in 2016; the city’s full-time workforce has been reduced from 1,255 to 904 since he took office, and salaries are down $5.6 million from last year. In addition, Mayor Guardian listed savings in other areas, such as liability insurance ($3.9 million) and a new prescription drug plan that will save $1.2 million, adding that newly enacted ordinances increasing fees could collect more than $1 million, while a revamped parking plan could generate an additional $500,000 to $1 million. But even such drastic fiscal actions would be insufficient; rather, as the Mayor said: restructuring debt will be key: Atlantic City has $240 million in bonded municipal debt and owes Borgata Hotel Casino & Spa $160 million in tax refunds. (The city paid $38 million in debt service and $27 million for tax appeals out of its 2015 budget.) So, Mayor Guardian believes that, with state support, Atlantic City could restructure the annual debt-service payment to $10 million or even $5 million that could be paid over 30 years—but, at a steep price: the city would likely have to put off its auction of Bader Field to use the 143-acre former airport as collateral: the minimum bid for the property at a city auction next month was supposed to be $155 million. In addition, the Mayor indicated that despite striking out thrice, he could try a fourth time to overcome City Council opposition and bring the Municipal Utilities Authority under the city as a water department—a move which could generate about $4 million annually for the city. Finally, the Mayor noted that, with help from the state, the city could realize significant savings through early retirement incentives, buying out police and firefighters with more than 20 years of experience: if 75 percent of those eligible for the buyouts took them, the city could replace them with new hires at starting salaries, saving another $6 million.

Motor City Comeback. New data on home and condominium sales and median sale prices in the Detroit metropolitan area demonstrates continued year-over-year increases in the four-county metro region – Wayne, Oakland, Macomb and Livingston counties – home and condo sales increased 11.1 percent last month from 4,004 in April 2015 to 4,449. In addition, median sale prices increased 6.9 percent during that same time period from $145,000 to $155,000. While Detroit is less dependent on property taxes than any other major city, the rising assessments, nevertheless, appear to be bellwethers of the city’s—and region’s—ongoing fiscal recovery.

Mayday for Maywood. Maywood, a small city in southern California of 40,000—if its undocumented immigrants are counted—some one- third of the city’s residents live in the U.S. without documentation, is a rainbow municipality: 96% Latino, of whom more than half are foreign-born. It is also a “Sanctuary City” for undocumented immigrants. But it is also today a municipality on the edge of municipal bankruptcy: the 1.2-square-mile municipality, one of the smallest in Los Angeles County, has amassed $16 million in debt that it cannot repay: California state auditors who examined the situation at City Hall found that city staff have been late with payments and failed to alleviate the crisis for years. In addition, the Los Angeles County district attorney is investigating allegations that Maywood repeatedly violated state open meeting laws when hiring and firing top city officials and amending zoning changes. Councilmember Ricardo Villarreal, who until last week had served as Mayor, said he was giving up that title in protest over what he described as mismanagement and other problems in the city. None of this is exactly new for the small city: it was on the edge of bankruptcy in 2010, when officials proposed laying off much of the City Hall staff, contracting out policing to the L.A. County Sheriff’s Department and having the neighboring municipality of Bell handle many administrative functions—a relationship which, however, was ended in the wake of the revelation of outrageous salaries paid to top Bell officials, revelations which eventually led to criminal charges. So it is, according to the California state auditor, that now Maywood is a “high-risk entity,” so that the state is conducting an extensive review of its finances and operations designed to assess Maywood’s financial health and its “potential for waste, fraud, abuse and mismanagement” which “may affect its ability to continue providing services to its residents.” The city is indebted some $16 million, including for civil lawsuits and unpaid pension obligations; the city still contracts out for most public services: its 11 city employees primarily perform accounting, revenue-collection, and code-enforcement functions. The state notes that in addition to its inability to meet its long-term debt obligations, the city also “has a history of making accounting mistakes and incurring late fees,” including $49,000 in 2014 because of late payments to its largest contractor, the Sheriff’s Department—and that the municipality has relied on non-operating revenue, such as legal settlements, to finance its operations. The most recent audit found that Maywood’s elected officials had “failed to adequately oversee” a city manager, who was fired in December after two new council members were elected. In the region, neighboring cities such as Bell, Vernon, and Cudahy have had to enact reforms in the face of criminal investigations, recalls, and threats of disincorporation from the state Legislature, but Maywood has not faced a similar reckoning. But now, it appears, the choice will be narrower: disincorporation or chapter 9 municipal bankruptcy.

Puerto Rico. Joe Mysak, in a Bloomberg Brief, writes: “Puerto Rico Is Not Pompeii, But It’s Still a Disaster,” wrote: “People are losing money by the bucket, and soon they’ll be losing money by the boatload. While regrettable, this is what happens when reality intrudes upon a fantasy…Because Puerto Rico has defaulted, is defaulting, and will default on some or all of the $70 billion in tax-exempt debt it has run up in the modern era as it borrowed to build stuff, and then to fill big holes in its budget…What makes it all so unusual is that this is the municipal market, where states and cities promise they will do everything they can in order to repay the money they borrow, including selling the streets and (gasp!) raising taxes. Instead, the governor was saying, Game Over.” Likening the unfolding events in the U.S. territory to the “eruption of Mount Vesuvius in the municipal market. Although only a little, because it’s Puerto Rico — a territory, not a state. Had an actual U.S. state done this, the municipal market would be like Pompeii, buried under six feet of ash.”
As it is, because it’s Puerto Rico, very few people in finance really care about it except for muni analysts, a handful of municipal mutual funds (which hold at least $7.9 billion of the bonds), some hedge funds (which hold about $20 billion of the debt), and of course Puerto Ricans (who apparently hold about $20 billion, much of it in their retirement accounts).
In Detroit, which filed for Chapter 9 bankruptcy in 2013, bondholders bore the brunt of creditor losses. Rep. Bishop said most restructuring in Puerto Rico would be “consensual.”’

“That’s a very defusing word. It was good to hear after so many months of listening to hedge funds and their mouthpieces talk about the constitutional guarantees on general obligation debt, and how anything less than 100 percent repayment would be unacceptable.

“Now, normally, I would be in the strict constructionist camp in regard to general obligation debt. Meaning: Hey, you borrowed this; you have to do everything in your power to repay it. But.

“The “but” is a combination of the island’s feckless management and flagging economy, the arrogance of the hedge funds who have been the island’s lenders of last resort, and Wall Street’s own culpability in stuffing this Caribbean piñata full of bonded debt it couldn’t afford. Puerto Rico is a very special case.

“Let’s begin with the economy. The island has been in a tailspin since a special tax break that made it worthwhile for manufacturers to set up shop there expired in 2006. That was the Crack of Doom. The tax break led the island’s management to imagine it had a full-fledged, manufacturing-based economy instead of a more typical Caribbean economy based on tourism.

“Then there are the bonds. There’s a publication put out by Moody’s every year called State Debt Medians, and it’s just the Best Thing, tracking states and how much they borrow by various measures.”

He writes that “Wall Street underwriters profited handsomely, making about $908 million on the island’s bond sales since 2000, Bloomberg News estimated in March of 2014 after Puerto Rico sold $3.5 billion in GOs.” Finally, he wrote about the big hedgehog in the room: hedge funds, noting that some of the hedge funds bought those “$3.5 billion Hail Mary GOs in 2014, which carried an 8 percent tax-exempt coupon. This was sold to give the island ‘breathing room,’ it was said, to clean up its finances…Some of the hedge funds bought Puerto Rico bonds from investors eager to sell as the island began its descent into the financial maelstrom. Those who bought at 70 or 80 cents on the dollar might still make money, depending on how those consensual negotiations go…It’s been interesting to hear these guys, on Twitter and elsewhere, discuss Puerto Rico. First they discounted the sheer staggering, insane amount of bonded debt that Puerto Rico had incurred, claiming that the $70 billion was just fine and utterly reasonable…Then they said that Puerto Rico was somehow in much better shape than it let on, even after the Governor declared that the debt was not payable. (Actually, we don’t know the true financial condition of the island, because the last audit we have is from fiscal 2013). Finally, the hedgies dug in their heels and said the debt they owned was legally guaranteed, and that they expected to be repaid at par. I respect this argument, and even might have embraced it at one point. But for a municipality in extremis like Puerto Rico, the legal niceties no longer apply.”

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