When the Fate of a Municipality Is in the State’s Hands

eBlog, 10/25/16

Good Morning! In this a.m.’s eBlog, we consider the denouement in Atlantic City, as it submits its final fiscal plan in a last-minute effort to avert a state takeover; then we jet to the warmer Caribbean, where the PROMESA board is in federal court to lift the provision in the new PROMESA law which imposes a stay on Puerto Rico debt-related litigation until at least next February 15th.

To Be or Not to Be A Municipality. The Atlantic City Council yesterday voted 5-3, with one abstention to approve a fiscal recovery plan, with the intention of staving off a state takeover. Atlantic City will submit the plan to the state Department of Community Affairs today—a submission that will trigger a seven-day window during which the State of New Jersey will have to accept or reject the plan—in which case the State of New Jersey would preempt local authority and take over the city’s finances for five years. Under the plan, Atlantic City would cut 100 more full-time workers (a year ago, the city’s payroll included about 1,150 employees serving a population of 39,551—or about 29 workers for every 1,000 residents—a percentage higher than Newark, the state’s largest city, which has 11 employees for every 1,000 residents, and Jersey City, with about 10 employees on the payroll for each 1,000 people.) Mayor Guardian, under the plan, has proposed selling the municipally owned airport to its water authority, and a settlement with the Borgata Hotel Casino & Spa over tax refunds, among other cost-cutting and revenue-raising measures. If implemented, the city’s revenues, which are projected to decline by about 10 percent this fiscal year from last, would balance because of projected salary and wage savings in excess of 30 percent (the plan proposes reducing the municipality’s full-time workforce from 965 to 865)—enough to produce total projected budget savings of $20 million, or about a 10 percent reduction from last year. The reductions are proposed to be gained by transferring a majority of the city’s senior and health services to Atlantic County, bidding out 10 services to the private sector, and utilizing early retirement buyouts in order to create “as few disruptive layoffs as possible,” according to the plan’s summary. The city has offered buyouts to 165 senior employees. The key to the proposed plan is the proposed sale of the municipal airport to the city’s Municipal Utilities Authority for $110 million: those proceeds, plus $105 million in low-interest financing, would pay down all outstanding debt to Borgata, MGM, and the state for deferred employee benefit costs, according to the summary; that would leave Atlantic City with $30 million in reserves. Under the proposed settlement, Atlantic City and the casino would settle for $103 million on tax refunds the city owes the casino (Atlantic City owed Borgata $150 million in tax refunds before interest after successful tax appeals by the casino; however, the settlement has not been finalized as Borgata waits to see if the state will accept the city’s plan.) In addition, the plan proposes savings via renegotiated labor agreements which propose:

• no salary increases,

• an elimination of longevity for future workers,

• a more affordable medical plan, and

• a reduction in overtime pay.

The labor deals also end terminal-leave payments and use a new salary scale with longer pay progressions for future police hires. The plan omits any proposal of a tax increase for five years; it relies on state aid to balance budgets. (New Jersey provided $13.5 million in Transitional Aid in the last fiscal year.) By 2021, the city projects receiving $13.8 million. The city will receive $26.2 million in Transitional Aid for 2016, according to city officials. Demonstrating the challenge of navigating between the state’s demands and the hard fiscal option, the vote was divided; some residents and four Members of the Council held a news conference ahead of the meeting, where they accused city officials of not being transparent about the plan and the city’s finances: Councilman George Tibbitt complained he had not received the 120-page document until 11 a.m. yesterday, just six hours before he was expected to vote, leading him and fellow Councilmembers Frank Gilliam, Moisse Delgado, and Chuen “Jimmy” Cheng to seek to adjourn the session in order to gain more time to review the proposal—or, as Gilliam said. “The public doesn’t have a clear understanding (of the plan).

Wherefore the Promise of PROMESA? The Puerto Rico Oversight Board has urged a U.S. District Court in four key Puerto Rico debt cases to continue a freeze on the litigation (see, viz.: Brigade Leveraged Capital Structures Fund, Ltd. et al v. Alejandro Garcia Padilla, et al, U.S. District Court, No. 16-1610). In order to proceed, the plaintiffs have asked the court to lift the provision in the new PROMESA law which imposes a stay on Puerto Rico debt-related litigation until at least next February 15th, unless cause could be shown: it is this stay which the plaintiffs in these four cases, as well as in other cases, have asked U.S. Judge Francisco Bessoa to lift. For its part, the oversight board noted its contention that “ongoing litigation is a major distraction that interferes with the Oversight Board’s Congressional mandate and that all parties’ time and resources would be better spent negotiating the fiscal plans required by PROMESA…It does not appear to the Oversight Board that any of the plaintiffs would suffer irreparable or even material harm during the pendency of the stay,” urging the court that the need for Puerto Rico’s government to spend its resources on providing services to its constituents in the midst of a fiscal crisis is paramount—and that forcing it to defend itself in a federal court would undercut Congress’ intent to develop and implement an economic and fiscal recovery plan, asking Judge Bessoa to lift the stay. In the alternative, in order for the PROMESA board to proceed during the stay, the board requested that the court order:

  • The Commonwealth to account for security interest funds, future revenues and expenditures, and any transfers to and from the Government Development Bank for Puerto Rico since the spring;
  • That reserve funds be used to make debt payments;
  • The Commonwealth provide the board with already requested information by deadlines this month;
  • The Commonwealth provide an explanation of the procedures and priorities that guide its disbursement of funds; and
  • The Commonwealth to be allowed to use security interest funds including intercepted funds for essential government services.

In its own submission, the Justice Department last Friday told the court that a lift of the stay would undermine Congress’s clear purpose in enacting PROMESA, writing: “If Puerto Rico’s revenues are diverted from essential services for the health, safety, and welfare of the inhabitants of Puerto Rico to payments of debt service, the human costs of such a decision would be significant,” requesting that Judge Bessoa use a strict measure of when there was cause to lift a stay and to wait for any potential action by the board in the cases.

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