The Teeter-Totter of Municipal Bankruptcy

eBlog, 8/02/16

In this morning’s eBlog, we consider the 4th anniversary of the nation’s longest ever municipal bankruptcy in San Bernardino: what lessons are there to be learned? How does its municipal bankruptcy compare to Detroit? Then we look to south Florida, where the small city of Opa-locka appears to be on the slippery slope into municipal bankruptcy.

Happy Anniversary? The City of San Bernardino yesterday completed its 4th full year in chapter 9 municipal bankruptcy—the longest in U.S. history. It is almost certain it will earn U.S. Bankruptcy Judge Meredith Jury’s gavel to emerge from bankruptcy this October: ballots for creditors to vote on the city’s proposed plan of debt adjustment were set to be mailed Friday, giving creditors until Sept. 2nd to object and the city until Sept. 30th to respond to those objections. U.S. Bankruptcy Judge Meredith Jury has scheduled a confirmation hearing — the final stage of bankruptcy — for Oct. 14, noting: “This case has gone at the speed it has to go…Now we have confirmation in view, and we’ll get there when we are supposed to get there. We are not Detroit, we are not Stockton; we came into this case in a very different posture, and therefore the fact that it took much longer to get to confirmation was to be expected.”

Confronted by a deficit exceeding nearly $50 million, or about forty percent of the $112 million in revenues the city expects this year, the city had filed for municipal bankruptcy when it reached the point of inability to provide for essential public services and recognized that without filing, the city’s creditors would overwhelm its future. In comparison, Vallejo, California emerged from chapter 9 in three and a half years, while Stockton emerged from chapter 9 in two and a quarter years. Detroit, which went through the nation’s largest municipal bankruptcy, was out of chapter 9 in less than 16 months; Central Falls, Rhode Island, in a much briefer time.

But the cost to the city of filing has been significant—estimates run to nearly $19 million alone in fees to the city’s attorneys and consultants, $6.2 million just over the last twelve months. But the price has not just been in dollars: the city’s voters have elected a new mayor, city attorney, and four of the seven City Council members—as well as the top unelected positions. Councilmember Fred Shorett, one of the few who has remained in elected office, notes: “I see us in much better shape: We balanced our budget, albeit with some deferrals. We have good new projects coming in, like the Carousel Mall…We’re still stretched very thin with our staff, and (City Manager) Mark Scott continues to remind us of that, but we’re going to continue to build that back up. I’m optimistic about the future of San Bernardino.”

Ground Zero. Opa-locka, Florida, the small city of the just 0ver 15,000 inside Miami-Dade County, is running out of funds—and leadership: City Manager David Chiverton stunned elected leaders by resigning his office in the course of a federal criminal investigation, and Opa-locka officials have announced the city is virtually insolvent and will be unable to pay its employees, including police officers next month. Mr. Chiverton had been a target of an ongoing FBI probe into corruption in Opa-locka; he had taken a leave of absence last spring after the Miami Herald revealed he paid himself tens of thousands in unused sick and vacation pay to which he was not entitled. (Other targets of the probe: Mayor Taylor and Commissioner Luis Santiago.) The city violent crime rate for Opa-locka in 2012 was higher than the national violent crime rate average by 618.54% and the city property crime rate in Opa-locka was higher than the national property crime rate average by 181.05%. Florida Inspector General Melinda Miguel last Thursday warned city leaders during an emergency oversight board meeting that with just $350,000 left in the city’s general fund, Opa-locka may have to consider bankruptcy. The warning came in a stunning sequence for the small city—one which has been under the oversight of a state financial emergency board since June, but has been unable to halt a mushrooming municipal deficit. The Florida Inspector General said she was upset by the city’s failure to meet yesterday’s deadlines to file a budget and recovery plan; the IG blasted the city’s elected leaders, stating they were not doing enough to keep costs down or tackling the critical problems that threaten the entire operation of the city: “I believe that we found that we are at ground zero of fiscal irresponsibility: While the city teeters on the verge of bankruptcy, we’ve had people ask what’s in it for me…From creditors, to commissioners, to employees, to crooks: what’s in it for me has to change. And we must all do our part…One of the biggest tests to resolving a problem is realizing you have one,” she said by phone from Tallahassee, as Opa-locka Mayor Myra Taylor and city commissioners sat in the front row staring at the local members of the state board. The new revelations about the city’s fiscal distress were significantly worse than Opa-locka’s own projections of last month.

In the meeting centered on the municipality’s impending insolvency—a municipality which just weeks ago had pledged that it was going to balance its budget, I.G. Miguel criticized the city for failing to stem spending at a time it is losing hundreds of thousands every month in revenue; she said the city had been raiding restricted funds to fill budget gaps and was in danger of defaulting on major payments: “Our message has been and continues to be: Not business as usual. And it still appears to be a leadership deficit in the city…While the city teeters on the brink of bankruptcy, we’ve had people ask: ‘What’s in it for me?’ From predators to commissioners to employees to crooks.”

Because Mr. Chiverton resigned yesterday, he qualifies for healthcare benefits through the end of the month; however, the oversight board chair put an end to any other perks, mainly because IG Miguel said she was troubled by his decision to cash in his unused vacation and sick time — totaling nearly $40,000 — before he went on temporary leave in May. Ms. Miguel said she did not want Mr. Chiverton to receive any final salary-related payment from the city until the board reviews it; she also demanded that Mr. Chiverton turn in his city-leased Ford Expedition along with his cellphone and laptop. In addition, she insisted that city officials cut off his access to all Opa-locka government computers and to City Hall immediately. IG Miguel urged city commissioners and administrators to continue to make “drastic cuts,” warning the city needed to be far more judicious about how much it was spending on items such as cellphones for employees.

The most serious issue now confronting the city: the city’s cash flow: Acting City Manager Yvette Harrell, who had replaced Mr. Chiverton in May, told the board Opa-locka currently has just $354,121 in its general fund — far below the millions it once maintained; the municipality also has $1.7 million in its water and sewer fund, and $1.2 million in a restricted reserve account. Nevertheless, with all of the city’s obligations, including payroll for Opa-locka’s 160-plus employees, Ms. Harrell warned the city will run out of money by next month: “Optimistically, by the end of September…Realistically, it will be closer to the beginning of September.” Indeed, so grave is the fiscal crisis that board members even debated whether the city could dip into the water and sewer fund — money set aside to fund Opa-locka’s badly deteriorating water system, with Ms. Harrell warning that if the city did not tap into the fund, Opa-locka would be broke within a couple of weeks: “Then, it’s lights out.” As it stands, Opa-locka will not be able to pay scores of its vendors — including contractors and health insurers —if it is to meet its next payroll early this month.

Uh oh. In addition to the city’s looming fiscal insolvency, it also confronts an ethics insolvency: the FBI’s corruption probe, which was launched three years ago. City Attorney Vincent Brown said several Opa-locka employees have been interviewed by FBI agents and have testified before the grand jury in Miami, adding the investigation was “ongoing,” and urging members of the community to contact the FBI in case they witness suspicious activities among elected leaders or city administrators. The city may also be in default of privately placed notes held by a local bank that could be accelerated – a fiscal challenge to be addressed in consultation with Florida Division of Bond Finance Director Ben Watkins.

Last June, the Governor had named a nine-member oversight board after Miami-Dade County determined the municipality was in a financial emergency and entered an agreement to get professional assistance from the state. Gov. Scott named IG Miguel as chair. At a recent session, board member Frank Rollason, City Manager for nearby North Bay Village, queried: “Can a municipality go bankrupt?” (In Florida, [see §§218.01 and 218.503], a municipality is authorized to file for chapter 9, but only after first obtaining prior approval from the governor.) Already the city has been barred from issuing any new municipal debt without IG Scott’s approval. That approval, itself, is almost certain to also depend upon the outcome of pending investigations by the Securities and Exchange Commission and the FBI, with the SEC examining whether Opa-locka properly disclosed its financial condition in its municipal bond documents for as many as two issuances that were privately placed with local banks; the FBI has raided city offices and removed documents which are believed to be related to spending irregularities. Meanwhile, the State of Florida has, to date, offered no state assistance to assist in Opa-locka’s recovery: the state oversight board has discussed the possibility of an advance from revenue-sharing funds to help the city through the lean months ahead before property tax collections come in; however IG Miguel has noted: “There’s got to be some other demonstration of fiscal responsibility: I’m not inclined to make that recommendation,” noting: “I must just point out that absent a budget, absent a financial recovery plan, absent an audit, and further demonstration of a cooperation issue or lack of cooperation issue constitutes malfeasance and misfeasance under the agreement,” she was most reluctant to recommend such assistance.

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