The Awkward Mix of Democracy, Governance & Insolvency.

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eBlog, 8/29/16

In this morning’s eBlog, we consider the important debate between candidates in November’s municipal election in what could be post-bankrupt San Bernardino on the critical issue of the city’s charter—an issue we had noted in our original report on San Bernardino to be “a key challenge” if the city was to have a future. Then we turn, again, to the aftermath of the City of Cleveland’s rejection of nearly insolvent East Cleveland’s proposal to be annexed by Cleveland: what options are next? Then we veer south to consider the enduring confrontation in municipal distress and bankruptcy between public pension obligations and essential public services—and municipal bondholders—today in not just Puerto Rico, but also in the nearby Virgin Islands.

Is Post Chapter 9 as Simple as a Coin Flip? In our original report on critical factors which forced San Bernardino into the longest municipal bankruptcy in U.S. history, we wrote that in the estimation of most individuals, “a key challenge for the city is in its charter. Decision-making authority over budgets, personnel, development and other matters is fragmented between and among the mayor, city manager, city council and city attorney—as well as several boards and commissions. Elected officials do not have the power to alter the salary calculations resulting from these provisions (except through voluntary negotiations with the representatives of that set of employees). These provisions greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” So too does the city’s plan of debt adjustment awaiting final approval from U.S. Bankruptcy Judge Meredith Jury’s approval next month. Indeed, the city’s plan calls for the city to “update the charter to operate in a more efficient, accountable, and transparent way.” So now it is that a new version of the charter — in essence, a constitution that structures the city’s government and limits what officials may do — will be on the ballot Nov. 8, after a citizen committee determined that the existing charter contributed to the city’s problems and spent nearly two years writing a new one. But whether it will remain has become a political football.

The argument in favor of the new city charter is signed by Jill Vassilakos-Long, president, League of Women Voters of San Bernardino; Albert Karnig, president emeritus, Cal State San Bernardino; Margaret Hill, board member, San Bernardino City Unified School District; Gloria Macias Harrison, small businesswoman; and Chris Mann, founder, Inland Empire Taxpayers Association.

“The Bankruptcy Court’s Recovery Plan called for the city to update the charter to operate in a more efficient, accountable, and transparent way,” they argue, listing some of the components of the proposed new charter. “Measure L does that so San Bernardino can get back on the right track and begin to move forward.”

Because, now it is that former City Attorney James Penman and his opponent in November’s election, Tim Prince, each believes that changing the city charter would be a bad idea; moreover, they represent groups which have submitted ballot arguments against the charter change proposal. Their arguments, however, are different—creating a distinct challenge for City Clerk Gigi Hanna: on which may voters opine? Being on vacation in Oregon, she opted to flip a coin to decide—an action which the loser, Mr. Penman, the former city attorney, ergo, objected to as a “clandestine” coin toss, saying she should have selected the argument signed by himself and other current and former elected officials: “You have chosen to print an opposition argument with little or no substance, one signed by citizens whom we assume are well-intended but who, unfortunately are not as well informed as to how the repeal of our current, pro-public city charter and its replacement by a voter unfriendly substitute, will impact San Bernardino City governance…Just as disturbing is the fact that you purportedly made your decision based on a ‘coin toss,’ held without any notice or public announcement beforehand.” In a follow-up email, he added that his interpretation of the law his group’s argument should be put on the ballot, warning: “Failure to do so could result in a subsequent invalidation of the election outcome, in our opinion.”

Mr. Prince, who ran to replace Mr. Penman as City Attorney, responded: “That’s typical banter from a really disastrous city attorney who took over this city at its top as an All-America City, as a city that had a bright future, and, through his personality, flaws, and defects literally ran us into the ground and wouldn’t let go his clutches until we were gasping for our very life in [federal] bankruptcy court…and he still thinks he has the answer.”

Under California’s election laws, when more than one argument is submitted, the code states that the city election official (Mr. Hanna in this case) “shall select one of the arguments in favor and one of the arguments against the measure for printing and distribution to the voters,” instructing said official to give preference, in order, to members of the legislative body authorized by that body, the sponsors of the measure, bona fide associations of citizens, and individual eligible voters. Although Mr. Penman’s first contention was that the coin toss should have been public, in the wake of consulting the election code, he noted that his argument was the only one signed by a member of a legislative body — Councilman John Valdivia, the only councilman to vote against putting the charter on the ballot; thus he acknowledged that Council Member Valdivia was not authorized by the City Council, but said it would be unrealistic for the majority that voted against him to make that authorization. Ergo, he wrote: “Nonetheless, the intent of the Legislature in passing §9287 is clearly shown by stating that a member of the legislative body was to be given preference in writing a ballot measure argument under the conditions stated…We contend that the spirit of the law, giving preference to a member or members of the legislative body, should be applied by you in this case and the argument against Measure L signed by Council Member Valdivia should be the one printed.”

City Attorney Gary Saenz said his deputy, Jolena Grider, recommended a coin toss — or the roll of a dice in the case of marijuana legalization measures that also drew more than one argument against, but not the controversy.

Mr. Prince’s argument was signed by Clifton Peters III, president, San Bernardino City Library Foundation; Roger Henderson, ambassador, San Bernardino Area Chamber of Commerce; Robert Porter, founder of the Facebook group “I Love San Bernardino;” Richard Avila, business owner; and Prince, who is vice president of the Democratic Luncheon Club of San Bernardino. It notes “checks and balances” of allowing people to elect the city attorney, city clerk and city treasurer, which would be appointed positions under the new charter, and emphasizes San Bernardino’s heritage: “This proposal to throw away our historic charter follows outsourcing City departments and giving away our historic fire department, reflecting loss of pride in our history and hope in San Bernardino’s future…We stand apart from cookie cutter cities in Orange County (from which our politicians’ high-priced consultants hail). Orange County suburbs lack San Bernardino’s time-tested charter, heritage and follows.”

In contrast, Mr. Penman’s argument is signed by John P. Wade, a retired Superior Court judge; former mayors Evlyn Wilcox and Judith Valles; Valdivia; and Mr. Penman: who claim Measure L would eliminate citizens’ votes, lessen accountability, mean no independence, and remove power from the elected mayor to give it to the unelected city manager, claiming it would take away voter choice and reduce “accountability to the people and increase exposure to mismanagement and corruption similar to that alleged in Bell, Beaumont and Moreno Valley.” Rebuttals to those arguments will also be distributed to voters—with the rebuttals due by sundown this evening.

Unmergering. In the wake of Cleveland’s unsurprising rejection of a merger with neighboring East Cleveland, the latter’s Mayor Gary Norton reports his city’s proposed “merger will be delayed until disaster and/or multiple preventable deaths occur; then there will be a shotgun wedding.” Indeed, as we noted last week, it was virtually inconceivable that Cleveland would be able to find any benefit out of what East Cleveland had proposed. If anything, the laundry list of demands likely poisoned the waters for any serious consolidation or merger. That puts the governance ball back before the Mayor and Council in East Cleveland–and the State of Ohio: should it press for the state to give it the green light to file for chapter 9? Should it opt for dissolution? Should it put together a realistic proposal to be incorporated into Cleveland? As they used to say in Rome: tempus fugit. (Time flies.) East Cleveland’s Police and Fire departments have been degraded to skeletal status; the city’s Service Department has only eight overworked souls responsible for the physical upkeep of municipal property. In the end, this is a difficult governance question: who will accept and assume responsibility for the children in East Cleveland so they have some chance for a future?

Balancing Unbalance. Even as the inexplicable and unaccountable delay in naming the PROMESA oversight board responsible for addressing Puerto Rico’s insolvency and determining its quasi-plan of debt adjustment debt crisis is deciding how to balance a $70 billion debt load with nearly $43 billion in unfunded pension liabilities pends, fabulous Matt Fabian of Municipal Market Analytics has noted the sharp conflict between the Commonwealth’s constitution, under which Puerto Rico is obligated pay the holders of its general-obligation bonds before making payments for essential public services or public pensions, the new PROMESA law does the opposite: it directs the as yet unnamed board to ensure pensions are adequately funded. It is a Gordian knot—with the option of reducing public pension payouts running the risk of accelerating the out-migration of younger, employed Puerto Ricans: accelerating the loss of those most critical to the island’s future economic growth. It is a problem, moreover, complicated by bondholder creditors, who have sued Puerto Rico in federal court, because the Commonwealth’s adopted budget increases funding for pensions, but does not set aside budget resources to address municipal bond obligations, or, as the hedge funds’ claim puts it: diverts “vast resources to purposes that apparently enjoy political favor but are indisputably junior to constitutional debt.” Municipal bondholders, not surprisingly, are looking to the outcomes of the plans of debt adjustment approved in U.S. Bankruptcy Courts in Stockton and Detroit under which pensioners emerged in better shape than municipal bondholders. (Puerto Rico’s public pension funds have about $2 billion in assets against $45 billion in liabilities: with young professionals leaving for the mainland, the imbalance, moreover, is worsening: Puerto Rico’s pensions are on track to be empty in just three years. The plight was summed up by Treasury Secretary Jacob Lew last May when he noted: “If people leave the island because they’re not willing to work and pay into a system that isn’t going to pay any benefits, how is that going to help the bondholders?”

In Puerto Rico’s Footsteps? Fitch has now joined Moody’s in downgrading the Virgin Islands, a U.S. territory not far from Puerto Rico, dropping its rating on the Virgin Island’s matching fund bonds, backed by the flow of rum tax revenues, and on V.I. Gross Receipts bonds, backed by the Virgin Islands’ Gross Receipts Tax revenues. Fitch added a twitch by dropping the territory’s general credit, or issuer default rating, more deeply into junk status. The downgrade appears to have been the outcome of Fitch’s decision early last month to put the Virgin Islands’ gross receipts bonds and matching funds bonds on a negative watch, in order to assess how the fiscal impact of PROMESA might be. That seems to have translated into Fitch’s decision to lift the Virgin Islands’ bond ratings two notches above its general credit rating, “reflecting Fitch’s assessment that the bonds are exposed to operating risks of the territory but benefit from enhanced recovery prospects assuming passage of legislation by the USVI legislature to provide a statutory lien on the respective revenue streams for bondholders.” Monday’s announcement said…Fitch believes a statutory lien would enhance the recovery prospects for bondholders should the federal government adopt legislation in the future allowing for a restructuring of USVI-backed debt.” In its ratings actions, Fitch noted: “The adoption of PROMESA demonstrated the capacity of the federal government to adopt legislation controlling territorial bankruptcy in much the same manner that a state might do to control the ability of municipalities to seek bankruptcy protection.” Ergo, Fitch plans to treat the territory similarly to a local government in applying dedicated tax bond criteria.

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