Balancing Fiscal & Physical Futures in Municipal Bankruptcy

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eBlog, 10/04/16

Good Morning! In this a.m.’s eBlog, we consider yesterday’s decision by the U.S. 6th Circuit Court of Appeals in favor of the City of Detroit in a challenge to the reductions the city made as part of its plan of debt adjustment affecting retirees’ benefits; then we look east where time is fast running out on some resolution to Atlantic City’s fiscal disharmony, before journeying just north of Atlantic City to New York City, where the first PROMESA oversight board meeting occurred to begin to seek to unravel Puerto Rico’s insolvency has commenced. Finally, we head back west to observe how the fiscal insolvency of East Cleveland is now putting human lives at increasing risk.

Preserving a Future. The U.S. 6th Circuit Court of Appeals has ruled in favor of Detroit in a lawsuit brought by city retirees whose pensions were reduced as part of Detroit’s plan of debt adjustment to emerge from the largest municipal bankruptcy in U.S. history two years ago (In its approved plan of debt adjustment, Detroit had proposed reducing payments to its retirees by $7.8 billion, as well as $4.3 billion in retirement health care benefits.) The 4.5 percent reduction led some retirees to sue, claiming three years ago they deserved the pension they had been promised before the city filed for bankruptcy in 2013. In Judge Alice Batchelder’s 2-1 decision yesterday, however, she noted it was “not a close call,” with the majority finding that altering the pension cuts would be a “drastic action” which “would unavoidably unravel the entire plan, likely force the city back into emergency oversight and require a wholesale recreation of the vast and complex web of negotiated settlements and agreements.” In her dissent, Judge Karen Nelson Moore wrote that the city’s retirees deserved their day in court, writing that they have been left “with the impression that their rights do not matter,” adding that Judge Batchelder and Judge David McKeague were citing a “questionable” legal standard to dismiss the case—and noting: “It has real-world consequences for the litigants before us — retirees who spent their lives serving the people of Detroit through boom and bust, and who feel that the city’s bankruptcy was resolved through a game of musical chairs in which they were left without a seat.” The court’s decision to reject the pensioners’ claims came after the state-mandated Financial Review Commission last month reported the city was in compliance with the Commission’s annual requirements to meet financial milestones. Indeed, if a January audit confirms it, then the Motor City would have just one more fiscal year to demonstrate good budget practices, and the state would consider lifting the demands that an outside board approve Detroit’s fiscal spending. Indeed, it seems the court’s decision could mark one of final remaining legal fights from the landmark case, which had multiple appeals pending in the U.S. Court of Appeals over the last year and a half.

Tempus Fugit. Time is running out for Atlantic City, with Moody’s reporting the city is in danger of missing its November debt service payment after it violated a term of a state bridge loan. Indeed, New Jersey’s Local Finance Board informed the city on September 22nd that it has until the end of Monday to cure the breach of a $73 million bridge loan agreement term that required dissolving the Atlantic City Municipal Utilities Authority by September 15th Moody’s had noted, writing that the technical default is a credit negative because it “indicates a disconnect between the city council, mayor, and state.” Instead, city officials had, as we reported, last week announced their own plan that would have the utility buy its closed Bader airfield from the city for about $100 million and asked state officials to wave the terms of the loan—a proposal which led Moody’s last week to term the city’s “impending technical default” as a credit negative, indicating “a disconnection between the city, mayor, and state.” The dysfunctional political gridlock now puts Atlantic City’s next municipal bond payment at risk, some $9.4 million due Nov. 4th, or, as Moody’s Doug Goldmacher put it: “Even if the city were to have market access, borrowing $100 million would increase debt by a factor of seven, raising the question of how the authority would pay for this debt — assuming the plan went through, which is far from certain.” Having already missed its state deadline to adopt a resolution to dissolve the Municipal Utilities Authority, the city could now be confronted by a state demand for immediate repayment of the $62 million already advanced. All of these accelerating demands come one month before Atlantic City is scheduled to submit a satisfactory five-year fiscal stability plan to the state, or risk state takeover. New Jersey could sell its assets and void or change labor contracts through expansive powers awarded by the legislation and signed by Governor Chris Christie when the state provided the loan.

For Mayor Don Guardian, who faces reelection in December, the runway ahead is perilous: first, the effort to capitalize the city’s airfield, the municipal utility authority (MUA), in order to borrow money, must appear before the Local Finance Board for “findings”—that is, the board can make “positive” or “negative” findings. (It seems there may have been maybe five cases of negative findings over the last two decades.) While negative findings would not bar Atlantic City from borrowing, such findings would likely impose higher borrowing costs. Of greater challenge, however, are a series of hurdles, including: 1) The city would need to file an application with the Local Finance Board, which would then need to schedule a hearing within 31 days of an application being filed, after which the LFB has 10 days to issue findings. (NJSA 40A:5A-6 and 7)—that is a schedule inconsistent with the timing to repay debts and submit a plan. It seems the city would have to prove that the proposed purchase of Bader Field meets complies with the statutory authority that an MUA has—a legal challenge which experts believe would be difficult to scale—and which would, in any case, likely trigger litigation—as well as consume the increasingly decreasing time frame for some resolution, e.g.: how to conclude these items in time to fulfill the municipality’s cash flow loan obligations to avoid another violation of the state loan agreement.

All of these pressures come, moreover, amidst the profound silence from the state: that is, while the state has set deadlines, it appears it has opted not to take a constructive role: it has, as one expert advised, been silent on the “state on all things Atlantic City.” That is, the state appears to have offered no opinion with regard to the failure to move forward on dissolving the MUA—an increasingly critical issue, especially were Atlantic City to end up in court defending the state’s action to move on the collateral the city “pledged” through the loan agreement. Under either path, moreover, there would be costly litigation and delay instead of a constructive path towards resolution.

To Takeover or Not to Takeover. In some sense, it would seem the state intent from the beginning has been aimed at a takeover of Atlantic City; however, such a takeover would not only be costly for the state, but also would raise substantial grounds for challenging its constitutionality: Article 4, Section 7 of the New Jersey Constitution provides:

  1. The Legislature shall not pass any private, special or local laws:

             (12) Appointing local officers or commissions to regulate municipal affairs.

            (13) Regulating the internal affairs of municipalities formed for local government and counties, except as otherwise in this Constitution provided.

Moreover, the New Jersey Constitution only allows special laws upon petition of the municipality.

La Vaina. The Puerto Rico Oversight Board created under the PROMESA legislation convened its first session—not in Puerto Rico—but in New York City, amid further fiscal deterioration in the U.S. territory, yet without any seeming intent to act swiftly: the Board’s first action was to look for a head hunter who would be hired to scout for an executive director for the Board—a remarkable contrast to Detroit, for instance, where Kevyn Orr, almost immediately upon his selection by Michigan Governor Rick Snyder, acted within 24 hours to ensure the operation of vital or essential public services—and the halt of non-essential services. In New York, the Board named José Carrión III chairman and ordered Puerto Rico’s government to provide a fiscal plan in October—and adjourned. For his part, Mr. Carrión, an official in the administration of former Puerto Rico Governor Luis Fortuño, stated: “We will strive to work in a collegial matter for the benefit of the people of Puerto Rico.” Board member David Skeel introduced the bylaws, which Mr. Skeel said were intended to be consistent with the Puerto Rico Oversight Management and Economic Stability Act. The board also worked to clarify the rules on voting. Ordinarily, measures will have to be passed with four votes even if not all the seven board members are present. The board voted to direct Puerto Rico’s government to provide about eight types of fiscal and financial information to the board on a regular basis—and for the Governor or his representative to provide a fiscal plan to the board by a week from Friday—a five-year plan which, under the new federal law is to address fiscal responsibility, access to capital markets, fund essential public services, funding for pensions, and a sustainable debt burden. Even though the initial meeting was in New York City, Chairman Carrión said a main office for the board will be in San Juan, where the Board is scheduled to meet in mid-November. For his part, Puerto Rico Gov. Alejandro García Padilla said that notwithstanding his opposition to the “excessive powers [Congress provided] to the board,” he had to agree to it, because the alternative would have been catastrophic for the government’s provision of human services. He added that the board was a product of years of unwise government borrowing and the economic contraction that Puerto Rico has experienced in the aftermath of federal tax law changes—adding that he had appointed municipal finance expert Richard Ravitch, who had played a key role in a similar oversight situation involving Washington, D.C., to argue for the interests of Puerto Ricans.

Emergency Abandonment? The small, virtually insolvent Ohio municipality of East Cleveland was left without an ambulance after a loaned vehicle from neighboring Mayfield Heights broke down last weekend—meaning that while the city’s firefighters can drive to a scene in their fire engine and give medical care, they were forced to become reliant on mutual aid from neighboring departments to transport anyone to the hospital. The city’s own three EMS vehicles are dysfunctional. The small, distressed municipality, in which all firefighters are paramedics, began using the Mayfield Heights ambulance last Friday, courtesy of Mayfield Heights’ recent approval of its donation to the city, pending acceptance from East Cleveland City Council.

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