The Delicate Rebalancing of State versus Local Authority

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eBlog, 6/15/16

In this morning’s eBlog, we consider the delicate re-balancing of a state-local relationship in New Jersey with its takeover of distressed Atlantic City—and apprehensions about potential wash-over effects or fiscal distress contagion on neighboring jurisdictions. But we also note that Atlantic City is not yet ready to concede to the state takeover. So we observe this awkward balance of power. We watch and await Senate action—with time running out—on the House-passed, bipartisan legislation PROMESA bill—where the clock is ticking down with regard both to the U.S. territory’s looming insolvency, but also to Congress’ long summer recess. Finally, we observe the municipal fiscal risk of walking away from one’s municipal financial obligations in the Virginia municipality of Buena Vista.

The Delicate Balance. A key issue in severe municipal fiscal distress is the state-local relationship: what legal rights and authority exist for the municipality? What rights and authority might be preempted by the state? What actions might be critical to prevent contagion—or the risk of fiscal distress to neighboring municipalities? And, finally, what is the end game? As we could observe in Atlantic City, where Ed Sasdelli, the fiscal monitor appointed by the State of New Jersey, last Friday stated he will depart at the end of this month—after five years’ of service—the most significant reason is that, under the state takeover legislation, the state monitor position will have to be full-time—and the ramp-up will be especially critical: under the takeover legislation Gov. Chris Christie signed into law last month, Atlantic City is mandated to draft a five-year fiscal plan that includes a balanced FY2017 budget; moreover, if the city fails to submit a plan—or if the plan it submits is deemed insufficient, the State of New Jersey can sell city assets, break union contracts, and assume major decision-making powers from the Mayor and Council. As part of the takeover package, the state provided a $60 million bridge loan and granted a grace period of five months to balance a more than $80 million budget deficit and prepare a sustainable five-year financial plan or face state intervention that allows New Jersey’s Local Finance Board to alter outstanding debt and municipal contracts. Ergo, unsurprisingly, Mr. Sasdelli noted: “I think that’s going to require much more than 18 hours a week from the state monitor.” According to the state, Atlantic City has $550 million in total debt and a budget deficit topping $100 million before state aid. The new state appointment comes as Atlantic City is working to close a $44 million budget gap as part of its five-year fiscal plan to avoid the takeover. Add another fly to the ointment: Atlantic City Mayor Don Guardian had wanted Mr. Sasdelli, in addition to New Jersey Local Government Services Director Tim Cunningham and the Department of Community Affairs Commissioner Charles Richman, to serve on the city’s fiscal plan committee, but was advised that “none of them would be permitted to join us because it would be a conflict of interest.”

Making Up Is Hard To Do. Even as this delicate shifting of power is underway, however, Atlantic City remains in an independent mode: the City Council has voted 6-3 vote to hire the municipal bond counsel firm of Manimon & Scotland to battle the proposed state takeover of the municipality, with Joseph Baumann, the chairman of the firm, noting his key focus will be on refinancing or restructuring Atlantic City’s $240 million bonded debt as well as $170 million in tax refunds owed to the Borgata casino. The virtually bankrupt city is paying the firm $180,000, according to Mr. Baumann, who notes “We will be involved in looking to address all of their debt issues…We’re looking forward to the challenge and hope we can make a difference.” As the ever experienced Marc Pfeiffer of the Bloustein Local Government Research Center advises: Mr. Bauman’s firm is reputed to be one of the best, if not the best in the state—and he comes with previous experience on municipal fiscal distress issues that should help address a complex, intergovernmental workout which will involve some taxable and non-taxable debt, some state intercept debt (“qualified bonds”), and possibly some use of Atlantic County’s strong position to act as a guarantor of city debt to improve its bond ratings and lower its interest rate cost.

Getting Ready to Rumble. U.S. Senate Finance Committee Chairman Orrin Hatch (R-Utah), chair of the committee of jurisdiction, yesterday indicated he believed the Senate would act on the House-passed, bipartisan Puerto Rico PROMESA legislation, although he said he was considering offering changes—even as he told reporters he did not think it is the “solution.” His announcement came as Senate Majority Leader Mitch McConnell—in the wake of a briefing on the bill by House Natural Resources Committee Chairman Rob Bishop (R-Utah), told reporters: “We’ll be taking up the House bill sometime before the end of the month.” That leaves little time to shepherd legislation through the Senate, conference with the House, and get the final bill to the President before July 1, when Puerto Rico faces a deadline on a $1.9 billion debt payment. Senate Majority Leader Mitch McConnell (R-Ky.) has not yet said when he might schedule the House bill for Senate debate. Chairman Hatch noted: “If we think we can improve it (the House-passed bill), we’re going to try to.” The problem is the clock: not only is there a default looming on July 1st, but also the House and Senate are scheduled to break in mid-July until September. Chairman Bishop said GOP senators seemed “up to speed” on the House-passed bill, adding that GOP senators had questioned if there are any taxpayer funds included in the House Puerto Rico bill—in response to which Chairman Bishop made “very clear this was not a bailout,” even as he warned: “If you don’t do anything you’re going to have a bailout.”

Trouble in Buena Vista. The issuer of nearly $9.2 million in municipal debt, the small municipality of Buena Vista, Virginia, has been sued by the insurer of its municipal bonds, ACA Financial Guaranty Corp, in the wake of the municipality walking away from a $9.2 million debt on its municipal golf course. ACA has been making insurance payments on the bond interest on municipal bonds used issued in 2005 to insure bonds used to finance the Vista Links course: when the city defaulted two years ago, the insurer stepped in this week, asking the Buena Vista Circuit Court to order the city to resume payments. Should the municipality refuse that would tee up foreclosure proceedings on the golf course and the buildings that house City Hall and the Buena Vista Police Department, buildings which the municipality had pledged as collateral when the bonds were issued. Even though ACA had indicated its reluctance to actually seize possession of city hall, the firm’s attorney said that remains an option—with provisions in its suit detailing how the city would not be able to find a new home for its evicted governmental offices without the permission of ACA, should the firm prevail in court. Clearly, however, the company would prefer not to own and operate a golf course: instead it is seeking that the “City Council should honor its promises and pay back the money it borrowed. Even the city has to pay its debts.” In retrospect, it seems the city made a risky fiscal gamble more than a decade ago that municipal revenue from the course, along with the residential and commercial development that the city imagined it might generate would be sufficient to help Buena Vista pay off the lease revenue bonds used to fund the initiative. However, not only did the venture struggle financially, but the Great Recession inflicted telling fiscal blows; thus, under a post-recession agreement five years ago, ACA agreed to allow the city to make half payments through this year—when the unpaid balance was to be added to the end of the bonds’ lifespan. However, a year and a half ago, the Buena Vista City Council voted to stop making payments: city officials have said that while they are no longer able to survive financially under the terms of the municipal bond agreements, they are open to a settlement of some kind with ACA. But it appears they have exhausted the patience of their lender.

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