The Stark Differences in How Cities May Exit Municipal Bankruptcy, & The Hard Challenges of Municipal Governance in Insolvencies.

eBlog, 12/07/16

Good Morning! In this a.m.’s eBlog, we consider the green light flashed by U.S. Bankruptcy Judge Meredith Jury yesterday, clearing the way for San Bernardino to exit the longest chapter 9 municipal bankruptcy in U.S. history—and in ways profoundly different than Detroit because of the very different state roles and laws with regard to chapter 9 and governance in municipal bankruptcy, and that San Bernardino—like Jefferson County—remained under elected local leadership throughout their respective journeys into and out of municipal bankruptcy. Then we turn to last night’s recall by voters in the small, insolvent municipality of East Cleveland, in the wake of the narrowest of margins—but at an unaffordable cost.

Smooth Sailing Out of Municipal Bankruptcy. In what San Bernardino Mayor Carey Davis yesterday described as a “monumental day…[where] the hard work has paid off,” referring to U.S. Bankruptcy Judge Meredith Jury’s statement yesterday: “We have a lot left to do, but this clears the way for us to do much of that work,” as she yesterday confirmed the City of San Bernardino’s plan of debt adjustment, confirming its path early in the new year to exit from the nation’s longest ever chapter 9 municipal bankruptcy as early as next March. San Bernardino City Attorney Gary Saenz expressed elation at Judge Jury’s green light, noting: “I’m so pleased and excited about where the city is now compared to where we were when we filed bankruptcy and what we were able to accomplish and that we now have a solid foundation upon which to build this city. The confirmation should certainly help the rest of the city and the world recognize that San Bernardino is back.” Even Judge Jury joined in praising the city for its endurance and stamina over the long road, noting that over the four-year span she had observed that had improved not just its finances, but also its governance, pointing to the municipality’s voter-approved new charter and better working relationships among elected officials: “The city came in financial chaos, and it’s leaving in much better shape…I have lived in this region for 40 years…and I’ve always said the city needed help. I’m glad it got it.” Under the city’s now approved plan of adjustment, it will pay the bulk of its creditors far less than they would otherwise be entitled to—in many instances merely one cent for every dollar such a creditor is owed; however, the city’s plan also outlines changes to the structure of the city, some of which, including outsourcing of refuse and fire services, and the passage of a new city charter, have already been implemented. City Attorney Saenz estimated that even though the costs to the city of its filing will be in excess of $20 million, its now approved chapter 9 plan of debt adjustment will save the city’s taxpayers more than $300 million worth of debts that will be officially discharged.

With regard to the record length of time, Judge Jury said the case, which hinged significantly on deals with major creditors, took the right amount of time. Moreover, several of the city’s major creditors in the case concurred in the congratulations, contrasting the city’s process and efforts specifically to Detroit, the nation’s largest-ever chapter 9 municipal bankruptcy, by noting both the significant state role and imposition of an emergency manager in the former—in contrast, the State of California was simply an absent, if not contributor to San Bernardino’s insolvency and consequent chapter 9 filing. Indeed, attorney Vincent J. Marriott, who represented municipal bondholders who held approximately $50 million of the city’s tax-exempt bonds, noted: “Here the city had the challenge of being not only economically viable but politically palatable,” said. “As is appropriate, that took time. I think the result today is really a tribute to all the work and thought that went in from the city.” Further challenging San Bernardino was the inability to gain any concessions on its public pension liabilities—in sharp contrast to the Detroit plan of debt adjustment, which provided for reductions in both Detroit’s public pension and post-retirement benefit obligations after San Bernardino’s attempts to negotiate with the California Public Employees’ Retirement System (CalPERS), therefore forcing the city to negotiate steeper concessions from all its other creditors. (The San Bernardino police union did reach an agreement with the city last year which includes concessions on leave time from before the bankruptcy filing, legal claims related to the imposition, and retiree health care.)

The last hurdle, as we have recounted previously, came after Judge Jury held for the city against efforts by attorneys representing clients injured by the San Bernardino Police—who had argued that the exceptionally low offer demonstrated the city, in its plan of debt adjustment efforts, had not acted “reasonably,” nor “in good faith,” provisions required for the federal court to confirm a municipality’s plan of debt adjustment. In rejecting those debtors’ claims, Judge Jury told their attorney: “I’m not trying to diminish the injuries to your client…But I’m also saying at a human level what the police and others have given back do affect the livelihoods of their families. It’s not a dispassionate institutional creditor.” Finally, Judge Jury concurred in one of the very few areas in the city’s plan of debt adjustment calling for increased spending: for the city’s police department. Judge Jury noted: “Anybody that lives in this area knows that the crime problem in San Bernardino is substantial…They have to get safe for people to want to live there.”

Pearl Harbor Day on East Cleveland. East Cleveland voters yesterday recalled both Mayor Gary Norton Jr. and City Council President Thomas Wheeler in a special election, with the final, unofficial results finding that Mayor Norton lost by a margin of 20 votes (548 to 528), according to the Cuyahoga County Board of Elections website, while City Council President Wheeler lost by an even narrow margin of 18 votes—with the official tally to be released on December 19th. Yesterday’s recall election marked the third time Councilmember Wheeler had been subject to recall: he prevailed exactly one year ago, and then, again, last June—albeit by a mere 51-49 percent margin, and with a turnout of only 7 percent of the city’s registered voters. For the ousted Mayor, the recall marked the first such election. In a statement last night, Mayor Norton noted: “I love the people of East Cleveland, and it has been an honor to have served them.” In the wake of the recall, Council Vice President Brandon King will be sworn in as the new Mayor in three weeks, and the remaining City Council members will have to appoint two leaders to the Council to fill the empty slots: under the Council’s procedures, should the Council find itself unable to agree upon such appointments, Mayor-to-be King will choose who fills those seats, according to Council President Wheeler.

For the small, insolvent municipality of East Cleveland, a city which Ohio Auditor Dave Yost’s office four years ago declared to be in a state of fiscal emergency, and last year stated that municipal bankruptcy or merging with Cleveland were the two most viable options for the suburb, the interim has been like waiting for Godot. Indeed, the small municipality has been awaiting some response from the State of Ohio with regard to its request for authorization to file for chapter 9 municipal bankruptcy, and some response from both the state and City of Cleveland with regard to its proposal to be annexed, the disruptive election carries a fiscal cost: yesterday’s election could cost the city between $25,000 and $30,000. (The city explored filing for chapter 9 municipal bankruptcy in May, but has been stymied by the state, because the Ohio Tax Commissioner’s office said the Council should ask permission from the state, not the Mayor.) Now, in the wake of last night’s results, the outcome could mean what outgoing Council President Wheeler last night described as “dramatic chaos:” “They wanted me out, and it took them three times…Obviously they don’t want the city to move forward; they want to go back to the way things used to be.” In contrast, Devin Branch, who led the effort to recall the city’s elected leaders last night said the people of East Cleveland had spoken, and while voter turnout was low, the majority of the city opposes the current mayor: “Working class people of the City of East Cleveland are soundly against Mayor Norton.” The city explored filing for bankruptcy in May, but hit a roadblock when the Tax Commissioner’s office said council should ask permission from the state, not the mayor. The letter from the commissioner also detailed the plans that the city must have prior to filing for bankruptcy.

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