In this morning’s eBlog, we explore the difficult transition challenge in Detroit of the state’s public school system after 7 years of state control back to the city; we observe the deteriorating fiscal collapse of the small municipality of Opa-locka, Florida; and we observe the increasingly frantic negotiations, threats, and litigation in Puerto Rico as its big deadline approaches the week after next.
Public Schooling on Municipal Bankruptcy. Detroit Public Schools Emergency Manager and retired U.S. Bankruptcy Judge Steven Rhodes plans to meet with both Michigan officials and Detroit families this week to explain and discuss the implementation of the state’s $167 million “rescue” plan for the Detroit Public Schools (DPS) which Gov. Rick Snyder signed into law yesterday—which includes $467 million in debt relief and $150 million in start-up costs for creation of a new debt-free school district—at a meeting today at which key players from Gov. Rick Snyder’s office, the state Treasury, and the Michigan Department of Education are expected. Under the new laws, the school district will be divided on July 1 into two corporations as part of this plan enacted to prevent the system from filing for municipal bankruptcy: The existing DPS district will stay intact for tax-collection purposes to retire $617 million in debt over 8½ years, including $150 million for transitional startup costs to launch a new district and to ensure it has enough cash flow to operate. The new district, which will receive the $617 million infusion of state funds to cover the lost tax revenue, will educate students. A new school board will be elected in November, and a commission of state appointees that oversees city budgets will also review the schools’ finances. The new law splits the old DPS in two, leaving the old entity to pay off debt through existing millage, while a new debt-free district will receive its full state funding allowance to focus on education. Judge Rhodes is expected to serve as an official “transition manager” for the newly created school district. Under the legislation, the transition manager would run Detroit schools until new school board members take office next January after November’s elections. Judge Rhodes wants to ensure everyone “is on the same page as it relates to knowledge” of the legislation, so that participants can begin working together on a project management plan to implementing the state assistance package and launch of a new Detroit Public Schools Community District.
The learning curve will be challenging: the state assistance plan was adopted on a partisan vote without a single vote of any Detroit legislator: the greatest challenge is likely to be with regard to charter school proliferation in the city and the growing percentage of special education students who attend the traditional public school district. Because the new state law omits a proposed commission which would have had governing authority with regard to the placement of traditional and charter schools in the city, there are expected to be significant challenges for the new DPS. Indeed, Michigan Education Superintendent Brian Whiston yesterday noted: “The conversation isn’t going away,” adding that charter school proliferation is also causing challenges for other urban school districts in Saginaw, Benton Harbor, and Pontiac—or, as Mr. Whiston described it: work creatively to get more funding (for DPS) if we have to…and also to look at how we manage the opening and closing of schools — to do it in a way that provides parents’ choices, which is important, but also in a way that we manage those choices.” (One of the newly enacted state DPS provisions directs the state to develop an “A-to-F” grading system, so Detroit parents can better decide which schools, whether traditional or charter, are the best.
Will There Be a State Bailout? Opa-locka, Florida leaders have met in an effort to address critical financial crises which threaten to plunge the small municipality into municipal bankruptcy—with Commissioners voting earlier this week to dip into resources in the city’s wastewater reserve fund to make payroll this week—even as the small municipality has stopped payments to mechanics who work to keep the municipality’s old police cars working: Opa-locka is over $1 million in debt. But even that debt seems to pale compared to the growing, day-to-day challenge of operating, a challenge so severe the city commission had felt compelled to dip into the municipality’s sewer fund reserves. Florida’s Gov. Rick Scott has already declared a state of emergency for the city—and now recognizes it might have to act to bail the city out. Even the city’s governance has been challenged, with the commission appointing former mayor John Riley to fill an open commission seat after former commissioner Terence Pinder killed himself—as he was confronting bribery charges. The new Commissioner Riley told his colleagues: “First of all, I want to really find out the status of the city and what’s been done and what’s not been done.”
Tropical Fiscal Storm. Hedge funds Jacana Holdings, Lex Claims, MPR Investors, and RRW I yesterday filed suit in federal court in New York, seeking to have the federal court bar Puerto Rico from using its April-adopted Puerto Rico Emergency Moratorium and Financial Rehabilitation Act for its general obligation bonds—and to seek the court’s intervention to mandate that Puerto Rico prioritize the payment of the it general obligation (GO) bonds. (The plaintiffs filing currently hold bonds from Puerto Rico’s $3.5 billion 2014 GO bond sale—municipal bonds for which the bond’s indentures specify the underlying bonds are to be governed by New York law and use New York’s courts to resolve disputes.) The suit charges that “Governor Alejandro García Padilla has willfully violated the first priority guaranteed to general obligation bonds by Puerto Rico’s constitution and has flouted centuries-old federal constitutional protections for contract and property rights…,” adding that the “Moratorium Act is transparently unlawful.” Unsurprisingly—and even as the U.S. Senate could act by as early as next week to take up and consider the House-passed PROMESA legislation—the U.S. territory of Puerto Rico decried the resort to litigation as a failure to “continue good faith negotiations…” much less to “acknowledge the reality of the commonwealth’s fiscal crisis: This attempt by hedge funds to disrupt the commonwealth’s ability to keep the lights on and provide essential services for the 3.5 million Americans on the island makes clear that the Senate must act and pass PROMESA before July 1.”
In filing suit—rather than awaiting Congressional action or working for good faith resolution, the plaintiffs, in their filing, charged that the “Puerto Rico legislature lacks the legislative authority to modify New York’s law of contracts…,” adding that “In case the available revenues including surplus for any fiscal year are insufficient to meet the appropriations made for that year, interest on the public debt and amortization thereof shall first be paid,” but also adding that Puerto Rico’s Moratorium Act breaks the contract and due process clauses of the U.S. constitution. The filing occurs in the midst not only of Congressional action, but also confidential creditor debt negotiations, including with some of the litigants and other holders and insurers of Puerto Rico GO and Sales Tax Finance Corp. (COFINA) debt—negotiations which the Puerto Rico Government Development Bank yesterday reported had broken down.
Yesterday’s hedge fund suit followed in the wake of a growing pile of suits against Puerto Rico: last month hedge funds holding more than $750 million of the debt of the GDB revived a lawsuit, accusing the U.S. territory’s government of “changing the rules of the game” by amending the Moratorium Act, seeking in the revived litigation to overturn the Moratorium Act and Law 40, which Puerto Rico amended last month. Last week, municipal bond insurer National Public Finance Guarantee sued Puerto Rico in the U.S. District Court for the District of Puerto Rico, seeking to overturn the Moratorium Act. The resort to federal court likely emerges from both the faltering confidential talks with some of Puerto Rico’s municipal bondholders, as well as perceptions that litigation might produce a richer outcome for hedge funds than the pending PROMESA legislation likely headed to the signature of President Obama. All this comes as the proverbial clock is running down to next week’s deadline for Puerto Rico to pay $2 billion it does not have in interest and principal due on a variety of securities, which Governor Alejandro Garcia Padilla has made clear Puerto Rico cannot pay in full. Bloomberg reported that Puerto Rico’s benchmark general-obligation bonds traded yesterday at about 66 cents on the dollar to yield 12.8 percent.