The Challenges of Intergovernmental Relations in Insolvency

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eBlog, 8/04/16

In this morning’s eBlog, we consider the harsh and stark terms of a loan imposed by the Governor of New Jersey on Atlantic City, the prospects of getting high in San Bernardino—a city nearing exit from the longest municipal bankruptcy in American history, and the growing challenges of insolvency and financing of essential public services in Puerto Rico as the U.S. territory awaits the appointment of a fiscal oversight board.

State Holdup? New Jersey Gov. Chris Christie, in imposing a harsh loan agreement on Atlantic City, took exception to the city sending back the original agreement marked up with changes, making clear this was not an agreement between the state and the city, but rather a state imposed mandate, and saying: “You should just say, where do I sign? Thank you sir,” adding that with regard to the imposition and referring to the city’s elected leaders: “You are in no position to dictate terms to me when I’m giving you $74 [sic] million to stay alive.” Indeed, making clear the scorched earth nature of the one-sided agreement, last week, Gov. Christie made clear he wanted the loan “secured by every asset they have…So that if they don’t pay it, I get to take the assets, sell them and pay you (the taxpayer) back…My job is to protect the interest of the people who are giving them that ($73 million), and that’s all the people in the rest of the state.” The state-imposed loan agreement is unprecedented; prior short-term cash flow loans never had this type of requirement.

The $73M loan agreement between the state and Atlantic City is of an unprecedented kind in the state’s history, imposing conditions, including dissolving its water authority, barring or preempting municipal authority to sell or lease any asset without state permission, and ordering the city to provide a weekly report on its finances to the state—terms Mayor Donald Guardian described as “extremely overreaching.” The state loan carries a fixed 1.75 percent interest rate. The loan terms have been signed, but the funds have yet to be made available according to the Mayor, who added the city made its $3.5 million debt payment Monday. Other conditions for the city include dropping its claims in a lawsuit against the state education commissioner, submitting a draft FY2016 budget by a week from Monday, and issuing third-quarter tax bills that include school and county tax-rate increases.

The Mayor added that the loan would not have been necessary at all if about $78 million in non-taxpayer redirected casino funds due the city by virtue of recent rescue legislation were made available by the state: “We have been creative and steadfast in our resolve to maintain the City’s fiscal integrity…More recently, we had to work with the State to attempt to lessen the restrictions on a proposed loan agreement that the City regarded as extremely overreaching.” Indeed, Atlantic City officials reported the original terms offered by the state were “much, much worse” than what the city and state ultimately agreed upon, but declined to elaborate. In fact, the redirected casino funds have been long promised to the city by the state; however, in the final rescue package approved by the state legislature and signed by the governor, the city is held hostage until it approves a fiscal plan acceptable to the state—with a state-imposed deadline of November 3rd. Moreover, notwithstanding the withholding of funds to the city, the city, which, under the unprecedented loan agreement executed with the New Jersey Department of Community Affairs, acknowledges is the first collateral for the loan, the agreement sets out an even harsher demand under which the state will also seize the proceeds of assets such as the city’s airport (Bader Field—on which sealed bids are due Thursday for the now defunct municipal airstrip once valued at $850 million.) and the city’s Municipal Utilities Authority—or, as the Mayor characterized the nature of the taking: “Ironically, restrictions in the Act prevented the City from accessing non taxpayer funding…If this redirected casino revenue were available today, a bridge loan with interest from the State would not be necessary.” Adding fiscal insult to injury, the loan agreement also mandates Atlantic City to include in its 3rd quarter property tax bills any hikes to the school and county tax rate that each “appropriately accounts for the entire amount” of their respective levies. (Atlantic City does not set the school and county tax rate), and it mandates weekly reporting by the city of cash flow, proposed and actual spending, and all known accounts payable.

But that is not all (any reader wishing a copy of the agreement should contact me directly): other stipulations or mandates impose:

* The city has to initiate an ordinance by Sept. 15th to dissolve its water authority and allow the assets to be used as additional collateral should the city default on the loan; however, the ordinance can include a revocation clause, letting the city cancel the dissolution if it successfully pays back the state. The city must make a deposit account for proceeds from a Bader Field sale. Sealed bids for the former airport are due Thursday. The city initially set a minimum bid of $155 million, but later decided to accept sealed bids instead.

* The state loan agreement also stipulates that state aid might be used as collateral; however, it mandates Atlantic City to dismiss a lawsuit against the state that sought to gain access to the redirected casino funds, and putting proceeds from a sale of Bader Field into escrow as additional collateral. (The redirected casino funds are the last two years of a casino-funded marketing plan signed into law by Gov. Christie, which allocated $30 million a year to develop a city-wide promotional strategy that resulted in the DoAC campaign, free beach concerts, and a widely mocked art park. In addition, about $18 million in casino tax money that previously went to the state Casino Reinvestment Development Authority was targeted in the recent legislation to be sent to the city.)

The harsh terms—terms which threaten the city’s solvency perhaps more than its already difficult circumstances—came even as Mayor Guardian reported that Atlantic City was able to make a $3.475 million debt payment earlier this week, despite not receiving the loan by that date. Nevertheless, the Mayor said: “Moving forward, we will continue to work diligently to ensure the City continues to run efficiently while also concurrently putting together a viable 150-day Atlantic City rescue plan.”

It was unclear whether the county tax-rate hike referred to a previously announced increase. Asked about it, a frustrated Atlantic County Executive Dennis Levinson said: “I don’t know what it means…It means whatever they want it to mean in Trenton,” adding it depends on how “the smartest, most expensive lawyers” will interpret it. He also said that county taxpayers should not be on the hook anymore for an “over-assessment of the casinos” by Atlantic City. Meanwhile, a tea party group led by former city Councilman Seth Grossman is suing to block council’s action on the loan agreement: the lawsuit, filed by Liberty and Prosperity, claims the Council excluded the public in its July 28 emergency meeting when it authorized the city to strike the loan agreement. Councilmember Grossman said council went into executive session for “confidential” matters involving “attorney-client” privilege, but said the Council’s attorney, Robert Tarver, did not attend the meeting. City Solicitor Anthony Swan was at the meeting. Thus, in his statement, Councilman Grossman added: “They instead discussed a complicated 18-page document loaning money that can’t possibly be paid back so that the state can seize every valuable asset the city owns.” (A hearing has been scheduled for Monday before Judge Julio Mendez with the court assessing Councilmember Grossman’s claim that Atlantic City violated state budget law by not adopting a balanced budget and by refusing to specify how the loan will be spent—or, as he put it: “While under state supervision, Atlantic City broke almost every law on the books written to protect taxpayers.”)

The abrupt actions by Governor Christie appear to signal a sea change in the state’s oversight of local governments—this in a state with, heretofore, an extraordinary reputation for working with—as opposed to against—them. Some believe the Governor’s key motive is to try to usurp Atlantic City’s vital and potentially valuable resources as a means of coercing increased resources for a faltering state budget: in return for the emergency loan, the state has basically put a lien on everything important that Atlantic City could, after all, sell to realize fiscal resources critical to its recovery. One commentator advises, referring to this stark change in the state’s policy towards municipalities: “This administration is just evil.  They care not about local democracy – they are inventing a new language and process on the fly.”

Getting High to Exit Municipal Bankruptcy? The City of San Bernardino is now set not only to emerge from the nation’s longest ever municipal bankruptcy, but also to have votes by its citizens on not one, not two, but three initiatives to replace the city’s long-standing ban on medical marijuana dispensaries—with one of the options prepared by the city attorney’s office. The latter was drafted by an unusual coalition—one including city officials who have said they want to continue the ban, but would rather regulate it on the city’s terms, rather than risk someone else’s regulatory framework. Were the municipally drafted option to receive more than 50 percent of the vote and more “yes” votes than either of the citizen-submitted initiatives, the city-written measure would become law. Moreover, unlike those initiatives, the city version could be modified as state law regarding marijuana changes, which led the City Council to put the medical marijuana regulation on the ballot in a 5-2 vote Monday, albeit reluctantly, in some cases. Nevertheless, as Councilmember Henry Nickel noted: “(The vote) is to put this question to the voters…It will still be our policy to enforce the ban unless and until voters say otherwise.” The most vocal advocate of the ban was Mayor Carey Davis, who offered extensive evidence that marijuana legalization has been harmful in Colorado and suggested it would stretch thin an already understaffed police department. (The mayor does not have a vote: he may vote, however, to break a tie or to veto.) Under its charter, the city lacks any legal alternative to putting the two citizen initiatives on the ballot — other than immediately adopting the framework they suggest, and Deputy City Attorney Steven Graham advised councilmembers that was not an option either with regard to the measure that imposed a tax on marijuana: California law bars municipalities from passing a tax without a vote of the public; it is unclear, legally, whether a voter-originated tax can pass in an election at which council members are not up for a vote, which is the case in November, according to Councilmember Graham. The city-drafted measure would require separate licenses for marijuana cultivation, marketing, testing, distribution and dispensaries; application fees and enforcement fees would be set yearly to match the cost of providing the service. Under the proposal, dispensaries could only be within industrial zones, and could not be within 600 feet of a school, park, library or recreation center, nor within 100 feet of a residential zone or religious center. No two dispensaries could be within 1,000 feet of each other, amounting to a significant limitation on the number of dispensaries, according to the Councilmember, the primary author of the initiative.

Waiting for Godot. Puerto Rico Gov. Alejandro Garcia Padilla on yesterday approved a voluntary reduction of working hours for government employees after signing several laws to help reduce spending and generate revenue amid a severe economic crisis. The Governor’s action came in the wake of another multimillion-dollar default this week by the U.S. territory, which is struggling to stay afloat as it prepares to restructure a portion of its nearly $70 billion public debt with help from a federal oversight or control board, and as it awaits the naming or appointment of such by the White House. One of the new laws allows government agencies to reduce an employee’s workweek if there is a voluntary agreement to do so: public employees would be allowed to work four days a week in exchange for receiving only 80 percent of their salary. A second new law aims to boost revenue for a severely depleted public pension system in danger of running out of money in upcoming years: the law pushes public agencies to prioritize revenues for the retirement system over any other payments, expenses or disbursements. The island has underfunded public pension obligations by more than $40 billion. The new law comes as citizens have already been forced to accept new taxes and ongoing increases in utility bills amid a decade-long economic slump and an unemployment rate that hovers at 11 percent. The U.S. territory’s fiscal plight has been exacerbated, moreover, by the loss of some 200,000 citizens who have left for the U.S. mainland in recent years in search of jobs and a more affordable cost of living, leaving behind a disproportionate number of retirees depending upon an ever declining workforce to make contributions into the public pension system. Thus, Camuy NPP Mayor Edwin García Feliciano warned the measure aimed at boosting the public retirement system only postpones the inevitable: “Eventually, there’ll be a debt restructuring, and it will probably include cuts to the current retirees: There’s a conflict between retirees and bondholders for the same pot of money.” His comments came in the wake of comments earlier this week by Gov. Alejandro Garcia Padilla after vetoing a bill that sought to create a special fund so the government could make minimum payments on the island’s debt. Gov. Garcia said the government needs the limited liquidity it has to keep providing essential services; he added Puerto Rico should allow the as-yet unnamed federal control board ought to decide how much in resources should be set aside for debt payments.

The growing conflict between bondholders and retirees came in the wake of Puerto Rico’s payments Monday from funds previously placed in escrow accounts. Gov. Alejandro García Padilla earlier this week had vetoed a House bill to allocate $450 million for debt payments due in this fiscal year, according to his office. The approved budget has no money approved for paying the government’s debt. Instead debt service or debt service reserve accounts appear to be dedicated to pay the Puerto Rico Sales Tax Financing Corp. (COFINA), Employees Retirement System, Puerto Rico Highways and Transportation Authority, and Puerto Rico Industrial Development Company debt. But with fiscal resources running out, the choices of whom to pay—and who not is becoming increasingly difficult: the Bond Buyer notes that the Puerto Rico Infrastructure Finance Authority, Public Finance Corp., and Puerto Rico (general obligation), did not make their payments. According to Moody’s, the GDB owed $28.5 million, Puerto Rico owed $1.3 million for its general obligation debt, and PRIFA owed $700,000. Moreover, at the beginning of the week, Gov. Padilla’s office announced his veto of House Bill 2959 for the Commonwealth government’s payment of debt: the requisite funds for the payments were to come primarily from resources normally allocated to the PRHTA, but the Governor said this diversion was inconsistent with his policy of ensuring essential public services—and that it would be premature to allocate particular resources to paying debts before the control board set up under the Puerto Rico Oversight, Management, and Economic Stability Act is in place.


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