About Frank Shafroth

Frank Shafroth is the former Director of Legislative Affairs and Intergovernmental Relations for the Municipal Securities Rulemaking Board (MSRB). Mr. Shafroth worked with the executive leadership to manage the MSRB's strategic relationships with state, local and the federal government and monitor legislative and congressional activities that affect the municipal bond industry and the authority of the MSRB. He currently serves as the the Director for the Center of State and Local Leadership and Assistant Professor at George Mason University. Mr. Shafroth has more than 30 years of experience on Capitol Hill and representing state and municipal issues before Congress. Previously, he was chief of staff to Congressman Jim Moran (D-VA), advising the Congressman on economic, tax, housing and community development legislative issues. He was also director of government relations for Arlington County, Virginia, and has served as director of state and federal relations at the National Association of Governors and the National League of Cities. Mr. Shafroth was also a Peace Corps volunteer in Liberia and Colombia and, early in his career, served as a congressional aide and staffer on various House and Senate offices and committees.

The Exceptional Recovery Challenges in the Wake of the Nation’s Largest Chapter 9 Municipal Bankruptcy

November 16, 2018

Good Morning! In this morning’s eBlog, we consider the seemingly unending fiscal challenge to fully come back from the nation’s largest ever chapter 9 municipal bankruptcy, then, we try to escape the early Winter blast by seeking el sol in Puerto Rico, where Governor Ricardo Rosselló Nevares is poised to sign a tax reform bill into law.  

Moody Blues. Gov. Rick Snyder made a last-minute, personal appeal to keep Flint connected to the Detroit water system before it began using the Flint River for drinking water, former Flint Mayor Dayne Walling testified in Genesee District Court this week, telling Judge Jennifer Manley that the Governor had met privately with him and former Flint Emergency Manager Ed Kurtz in Detroit early in 2013, asking them to give Detroit the opportunity to make a best and final offer for a long-term water contract. That meeting came just days before the Mr. Kurtz, with Mayor Walling’s support, pushed ahead instead with plans to buy into the Karegnondi Water Authority (KWA) pipeline project to Lake Huron. The former Mayor has stated that he did not know emergency managers in Flint would go on to make separate decisions—decisions which led to the city using the Flint River as its source of drinking water until the KWA pipeline was put into service. He went on to testify that he alone had made the decision to use Flint River water, as he testified in preliminary examinations for four current and former officials with the Michigan Department of Environmental Quality. While Detroit’s best and final offer was known prior to Flint’s purchase of the Karegnondi water, the Governor’s involvement had not previously been acknowledged. However, under questioning by one of the Michigan Department of Environmental Quality defendants, Mr. Walling responded he had been involved in meetings prior to the City of Flint’s fatal decision—meetings which involved state officials, including Gov. Snyder—with the additional disclosures that Gov. Snyder had taken Mayor Walling and Emergency Manager Kurtz alone into a side room to ask that they consider remaining with Detroit, with the former Mayor testifying that Emergency Manager Kurtz, with the support of the Michigan Treasury Department, alone had the authority to act on behalf of the City of Flint—not the Mayor or other elected municipal leaders. By April of 2013, former Michigan State Treasurer Andy Dillon had approved the fateful go ahead.

Part of the reasoning appeared to be fiscal: if the City of Flint used the Flint River, the assumption was that would provide the city with millions of dollars during the construction of the Karegnondi line. Instead, it triggered a human and fiscal crisis for the City of Flint, Mr. Walling testified this week, telling the court Tuesday that he only learned of Flint’s plans to use the Flint River when he reviewed a new budget for the coming fiscal year and found no funding to continue water purchases from Detroit. From April of 2014 to October of the following year, Flint attempted to treat the river water; however, it encountered unacceptable levels of bacteria, lead, as well as chlorination byproducts. For the next year and a half, Flint sought in vain to address the bacteria, lead, and byproducts—even as Flint sought, repeatedly, for $30 million from the state—with Mr. Walling reminding the court the city had been effectively taken over by the State of Michigan via the imposition of an Emergency Manager.

Last month, residents and businesses affected by the lead-contaminated water crisis in Flint had asked a judge to reinstate Republican Gov. Rick Snyder and other Michigan officials as defendants in a class-action lawsuit, claiming that the Governor and his staff knew about health risks for months before making an official announcement: “The citizens of Flint were both forgotten and mistreated by those involved in the Flint water disaster. To this day, residents continue to suffer because of the reckless decisions of senior state and local officials.”

Not Just Like Flint. While we have noted the extraordinary fiscal recovery by Detroit from the largest chapter 9 municipal bankruptcy in U.S. history, the recovery is incomplete, and the Detroit Public Schools—the critical draw if families are to be encouraged to move from the suburbs into the city and fill its still vast areas of emptiness, Detroit will have to address its own grave drinking water issues. As Sarah Maslin Nir of the New York Times wrote this week: “For a year now, Marcel Clark, a Detroit police officer and father of three, has been filling a 50-gallon drum each week with purified water for his family to drink. Ever since he heard about the water contamination crisis in Flint, Mich., an hour’s drive away, he hasn’t trusted the aging copper and steel pipes in his house. He’s been talking to contractors about replacing them, and hopes to get the work done in the next few months. ‘As a responsible parent, I said to myself, let me go ahead and secure my family,’ said Mr. Clark, 48.” The issue, as we have previously noted, is in the Detroit Public Schools, where the water fountains in all 106 schools run by the Detroit Public Schools Community District have been dry since classes began last  August, and where the Superintendent ordered them shut off as a pre-emptive measure, after testing revealed elevated levels of copper and lead in drinking water at some schools. In the wake of completing checks at 86 of the schools last month, officials announced that 57 of them had lead or copper levels exceeding EPA safety levels—checks which had been occurring after the tragedy of Flint had prompted Detroit officials to start testing school water supplies in 2016, or as DPS Superintendent Nikolai Vitti put it: “We are talking about Detroit now because we proactively tested all water sources, and defined the problem with a solution…I think large urban areas around the country have infrastructure as outdated as ours is, and they don’t know if there is lead or copper in the water because they are not testing it.” (Based on Detroit’s experience, Dr. Vitti has called for a nationwide requirement for water testing in schools; there is no such rule now.)

In the wake of the Flint crisis, the Michigan Department of Health and Human Services began testing children for elevated lead levels, finding, two years ago, higher levels of lead in children under the age of 6 than in any Michigan county—nearly 9 percent, compared with a statewide average of less than 4 percent. While Detroit officials and water quality experts believe the issue may simply be aging pipes—aging which, because pipe joints and other plumbing components often contain metals which can leach into the water over time, and where the cost of ripping out and replacing in a system which is just emerging from its own insolvency and emergency manager oversight, man, as DPS Superintendent Dr. Vitti put it: “This is troubling for Detroiters, because it’s just a long list of examples where it feels as if people are treated as if they are second-class citizens,” adding: “We tested and were transparent, and so the focus is on us.”

Now Detroit officials believe a $3 million project to put filtration systems in every school, financed mostly by philanthropic donations, which will provide for the installation of the first of 800 new “hydration stations,” will help—albeit not for parents who fear their children have already been exposed—or for city leaders who are worried these stories could discourage families from wanting to move into the city.

Motor City Hangover? Moody’s, moodily, at the end of last week, noted that, notwithstanding the influx of “affluent residents and large scale developments,” the Motor City is still characterized by “High debt and pension burden,” with the “citywide population declining and per capita income just slightly over half the national per capita income.” Even though the city is far less dependent on property taxes than most cities, the rating agency described the property tax as remaining “weak.”  That is, notwithstanding the sparkling revival of a downtown too dangerous to walk around the block on the morning Kevyn Orr filed with the U.S. Bankruptcy Court, Moody’s noted the road back to full fiscal health is arduous. Indeed, even as the downtown, empty after dark on that first night in municipal bankruptcy, is now home to 10,000 new residents; however, Detroit’s population has continued to ebb: Moody’s wrote that more than 35,000 have exited, noting that the fiscal and governing challenge is not the then vacant and dangerous, but now vibrant downtown, but rather other parts of the city. Nevertheless, Moody’s remained upbeat, writing: “The trends, coupled with savings achieved through bankruptcy, have led to marked improvement in the Motor City’s financial position and credit quality.”

Detroit Chief Financial Officer John Hill noted the implementation of the city’s plan of debt adjustment has been a “work in progress: the city is coming back from a very hard bankruptcy, and everyone is actually surprised that we’re as far along as we are in getting out of oversight and making improvements in our credit rating that we have over the years.” The greater downtown area has experienced a 28 percent increase, or about 9,000 residents; however, that core downtown area makes up only seven of Detroit’s 143 square miles. It appears that there continues to be an exodus overall from the city. Moody’s believes that, thanks to numerous businesses relocating to the city, growth downtown will likely to continue fueling rising income tax collections—in a relatively rare municipality in that income tax revenues are a key municipal revenue source, and the city’s economy appears poised to benefit from its two most prominent redevelopment projects: Ford Motor Co.’s $740 million plan to redevelop the Michigan Central Depot and several nearby properties in Corktown, and Bedrock’s $1 billion development on the former site of Hudson’s store in downtown.

Moody’s also noted the city’s: Strategic Neighborhoods Fund, service improvements, blight remediation, and providing economic development and business incentives—or, as CFO Hill put it: he believes the Strategic Neighborhoods Fund will “bear a significant amount of fruit.” Through the fund, Detroit expects to invest more than $100 million, from a combination of financing through city, state and philanthropic arms, into 10 neighborhoods to improve redevelop parks, strengthen commercial corridors and rehabilitate housing, or, as he added: “The city is moving forward very well and making its own investment, but I think the larger community, both the business community and the philanthropic community, is making huge investments in the future of the city that impact neighborhoods as well.”

Moody’s was more moody with regard to the Detroit Public School Community District and its inability to address its capital needs. Even though DPS received a $617 million state aid package in 2016, it continues to experience elevated lead and copper drinking water levels in schools and other public in buildings, and it lacks the resources to address significant capital needs, even as DPS confronts more than $500 million in critical school repairs—or, as Moody’s put it: “Absent state support, or sizable philanthropic donations, the deteriorating facilities could become an increasing drag on the city’s revitalization efforts,” while CFO Hill added: “What we have been able to do in the past, the city has taken vacant school buildings and helped to remove them as blighted areas…That’s helped the school system to not have to maintain some of those vacant properties. So the city has been able to help.”

Mayhap ironically, the new report came just as departing Gov. Rick Snyder, speaking at a Detroit Economic Club meeting, spoke of the “absolutely incredible” progress Detroit has made since emerging from chapter 9 municipal bankruptcy. Now, with Governor-elect Gretchen Whitmer set to take the reins, it is not so clear the city is fully out of the fiscal woods: its property tax revenues remain weak, because, as Moody’s found, the “comeback” has yet to reach Detroit’s vast neighborhoods, so that: “Detroit is left with a combustible brew: a reliance on volatile revenue sources and growing fixed costs.” Nevertheless, the resolute CFO notes: the “property tax base is trending upward after a citywide reassessment lowered values to be more in line with market prices: “The city has turned the corner on the population declines of the past.” On the troubled public pension front, Moody’s found that the Duggan administration is working to address the looming resumption of normal pension payments in 2024, when the annual cost is estimated to be more than $143 million—that will be the year when the $816 million in “grand bargain” contributions to the city’s retirees from the state and philanthropic foundations expire. Having gained an okay from the Mayor and Council, CFO Hill has established a trust fund to store some $335 million over eight years in order to try and sustain pension promises.

Nevertheless, the city’s schools appear to be the most daunting fiscal challenge: Moody’s noted DPS “could also become a major drag on revitalization beyond downtown,” apprehensive about the unsustainability of downtown redevelopment absent quality public schools for workers filling once-vacant office space—a severe physical and fiscal challenge in a municipality where its reorganized public school district has no ability to issue debt to fix more than $500 million in capital improvement needs for more than 100 occupied school buildings spanning 10 million square feet, because the state DPS bailout bars DPS from accumulating any new capital debt until 2040.

Nevertheless, CFO Hill reminds us that the city’s municipal bond sale will mark the first time Detroit has entered the capital markets without the direct assistance of the State of Michigan since prior to state emergency financial intervention began in 2012.

Reforma de Impuestos. Governor Ricardo Rosselló Nevares of Puerto Rico will sign the tax reform bill into law, although there is still no certainty with regard to whether the PROMESA Oversight Board will endorse the law, because of the Board’s apprehensions related to the inclusion of amendments that would legalize slot machines outside casinos. Nevertheless, Gov. Rosselló Nevares, at a press conference, stated: “I’m going to sign it, because it’s a programmatic commitment,” adding that if the PROMESA Board does not endorse the bill, “those who make decisions in the government” must then focus on working on an initiative that can be approved by the body created by U.S. Congress. The Governor stressed that all the basic elements of the tax reform bill have the endorsement of La Fortaleza, the Legislature, and the Board. Credit for work, reduction of the tax on prepared foods and transactions between businesses (B2B) as well as reductions on income tax for corporations and individuals are among those “pillars.” These reductions in income taxes will not apply in the same way for those who are self-employed and small and medium businesses. The Governor indicated that the only element that causes doubts is that with regard to the impact that the legalization of the slot machines outside casinos would be with regard to the collections of the central government and public corporations. Specifically, the PROMESA Board has requested studies that certify that the legalization of these machines will not cannibalize the government’s collections, noting: “If there is an objection to the slot machines issue, I am sure that we who make decisions will sit at the table and, without rejecting other considerations, the issue (slot machines) can be considered at another time, so we can focus on the benefits (of the tax reform) now…if there is no objection to the slot machines, we will have a quick positive effect on the economy.”


The Unending Challenge of Municipal Bankruptcy Recovery

November 13, 2018

Good Morning! In this morning’s eBlog, we consider the seemingly unending fiscal challenge to fully come back from the nation’s largest ever chapter 9 municipal bankruptcy.

Moody Reds. No one ever wrote that the road back to fiscal recovery from the nation’s largest ever chapter 9 municipal bankruptcy would be easy, so even as the downtown, too dangerous to walk alone in when the National League of Cities held its annual Congress of Cities there decades ago, and where, on the very day that Kevyn Orr filed with the U.S. Bankruptcy Court, my downtown hotel warned me against walking the one mile from the hotel to the Governor’s Detroit offices to meet with Mr. Orr, the city’s recovery has been unprecedented. Nevertheless, outside of the gleaming downtown, the challenge of recovery continues to be marked by, as Moody’s puts it: “High debt and pension burden,” with the rating agency adding that “Citywide population is declining and per-capita income is just above 52 percent of the nation, and the property tax base remains weak.” While Detroit, unlike most U.S. cities, primarily relies upon income taxes more than property taxes, Moody’s, in its new fiscal report, reminds us that while the new downtown is a show piece, marked, as Moody’s notes, by an “influx of affluent residents (10,000 new residents, too) and large-scale developments,” the Motor City has experienced a net loss of 35,000 residents.

The new moody report emerged just hours before Gov. Rick Snyder, speaking at the Detroit Economic Club, touted the “absolutely incredible” progress Detroit has made since emerging from bankruptcy. That is, with the state having elected a new Governor, Gov.-elect Gretchen Whitmer, the recovery still has a ways to go. On the positive side, Ford Motor Co. has commenced construction on an self-driving car campus in the downtown area expected to employ 5,000, and billionaire Dan Gilbert is erecting a new, gleaming downtown skyscraper—both critical in a city which relies more on income than property taxes; nevertheless, Moody’s notes that property tax revenue “remains weak” outside of the 7.2 square miles of greater downtown; ergo, Moody’s analysts reflected that the much heralded “comeback” has yet to extend much beyond the downtown to its neighborhoods—neighborhoods with still too many vacant and boarded up homes—or, as Moody’s found: “Detroit is left with a combustible brew: a reliance on volatile revenue sources and growing fixed costs.”

Nevertheless, Detroit Chief Financial Officer John Hill described the city’s property tax base as “trending upward” in the wake of a citywide reassessment which lowered values to be more in line with market prices; he noted that Detroit “has turned the corner on the population declines of the past.” Moody’s, indeed, notes that Mayor Duggan is working to address the looming resumption of normal pension payments in 2024, as provided for in the city’s plan of debt adjustment—meaning there is a looming obligation of as much as $143 million after the so-called “grand bargain” which capped that plan of debt adjustment approved by U.S. Bankruptcy Judge Steven Rhodes. The $816 million derived from said bargain were vital in not only ensuring that no Detroit retiree fall below the federal poverty level, but also to offer the Motor City a much-needed decade-long reprieve from making such payments. Thus, with approval from the City Council, Mr. Hill has established a trust fund to amass some $335 million over eight years in order to recover its capacity to meet future public pension obligations.

Getting Schooled on Debt. Moody’s reserved its direst warnings for the Detroit Public Schools Community District, which Gov. Snyder and the Michigan Legislature rescued from the brink of its own, separate chapter 9 municipal bankruptcy filing after the system’s financial collapse in June of 2016, with Moody’s noting: “The (public) school district could also become a major drag on revitalization beyond downtown.” The instructive apprehension reflected the credit rating agency’s apprehensions that the rapidly mushrooming residential population growth in the Motor City’s greater downtown will be unable to sustain itself absent quality public schools—indeed, the very concern which led Chicago to focus on quality public schools in order to incentivize young families with children to move into the city. In Detroit, there is a school math problem: the city’s reorganized school district has no ability to borrow capital to finance the more than $500 million in capital improvement needs for more than 100 occupied school buildings spanning 10 million square feet. The Michigan Legislature’s $617 million bailout of the District’s operating ledger blocks the District from accumulating any new capital debt until 2040, with the system’s existing 13 mills for capital improvements dedicated to paying $1.63 billion in old debt from eight capital municipal bond issues between 1998 and 2010.

The moody Moody’s report came out ahead of Detroit’s planned sale of $115 million of general obligation bonds, bonds to which Moody’s has assigned a Ba3 credit rating: Detroit plans to sell the bonds to finance a series of capital improvement projects at the DDOT Coolidge bus terminal, neighborhood parks, the Charles H. Wright Museum of African-American History, and Aretha Franklin Park (formerly Chene Park), according to a memo sent Oct. 22 to City Council members. In addition, the proceeds will also be devoted to finance economic development projects and an expansion of the greenlight crime-monitoring camera systems at businesses across the city. CFO Hill noted the municipal bond sale will mark the first time Detroit has entered the capital markets without the direct assistance of the State of Michigan since prior to state emergency financial intervention began in six years ago, adding that Motor City officials are meeting with prospective investors the week after Thanksgiving, and telling Crain’s: “People will be banking on the city’s future and the fact that we’re back in the market.”

Could Physical & Fiscal Recovery Be at Hand?

November 9, 2018

Good Morning! In this morning’s election eBlog, with time still remaining before the end of the Caribbean hurricane season, we consider the stormy relationship and history between Puerto Rico and FEMA—especially as that might affect Puerto Rico’s 78 muncipios.

Emergency Fiscal & Physical Plans. Only a month before the end of the hurricane season, the government of Puerto Rico and the Federal Emergency Management Agency (FEMA) still keep the state emergency plan and the Strategic Plan “under review.” So far, the emergency plans of the 78 municipalities, which must be certified by the State Agency for Emergency and Disaster Management, are not ready. Even so, FEMA and the government claim to be ready to face any severe weather event.

Region II FEMA Director of Operational Planning Jesús Cuartas stated: “Currently, we are finishing the part that has to do with the hurricane annex for Puerto Rico. It will contain the tsunami and earthquakes elements. It’s an ongoing process.” (Region II is like a jigsaw puzzle: it includes Puerto Rico, New York, New Jersey, and the Virgin Islands.) Director Cuartas added: “From FEMA’s point of view, we are working with our documents, and the State provided us with theirs. However, we continue to refine that document in terms of the more complex aspects, broader strategies of possible variations of hurricanes that may come.”

Since September, El Nuevo Día has been requesting unsuccessfully the Strategic Plan developed by FEMA and the state plan, which must also be reviewed by FEMA. Director Cuartas, in an interview, noted: “We do not publish the whole plan until all its components are ready. For us, the goal is (to finish it) by the end of the year…The issue is not rushing to have something, but doing something that is in tune with current changes.” In addition, he clarified that the Strategic Plan is used for training exercises, and was put into effect when Hurricane Beryl represented a threat to the territory.

The NMEAD Commissioner, Carlos Acevedo, expressed himself in a similar manner: “Our plan has been ready since the end of July. It will have monthly changes; we will continue refining it.” He sent a copy of an October 2018 version of the state emergency management plan, a 236-page document, although Commissioner Acevedo acknowledged that he is missing some plans which remain incomplete: “Now, we are working with the distribution (plan), which is being completed. The only thing is that I requested some changes regarding two warehouses which are being acquired. The (plan) of mass aid is being translated from English to Spanish because FEMA developed it with our personnel.” In addition, he assured: “We are working on the government’s operational continuity plan…That is being done here with FEMA personnel. The Agency’s communications plan is being developed with everything that’s new. These plans are being worked on at the same time, some are more advanced than others. Here, a hurricane can come now and I am ready.” However, the former director of Emergency Management, Ángel Crespo, said that “if the plan is ready, it must be ready with all its annexes…It’s elementary.”

With regard to muncipios’ emergency plans, Commissioner Acevedo acknowledged that they are not ready: “We received that of the municipalities…I’m reviewing it with a task force,” he added, anticipating that over the next fortnight he will meet with the mayors and their respective Emergency Managers to discuss the plans. (FEMA does not certify the municipalities emergency plans, but reviews them to assess whether they are consistent with the state and Strategic plans.) The Commissioner added he would have to “check with FEMA when they can review them and add the information I’m asking for. I’m making it more comprehensive.” He noted that the muncipios “currently” have a plan which they can execute if there is a hurricane.

From the critical municipal perspective, the mayors have reported that they have plans, but stressed that the duty of NMEAD is to certify the documents submitted, which is necessary to receive FEMA funds in case of catastrophes. Mayor Isidro Negrón of San Germán noted: “We handled it just like the other time with María: with experience. The government was not going to be prepared, but municipalities were,” while Mayor William Alicea of Aibonito, a small town founded in the mountain region in 1630, reported that he submitted his plan on September 7, but is “still awaiting approval.”

Fiscal Momentum? Wednesday, in court, the PROMESA Oversight Board stated its intention to achieve as many agreements as possible to renegotiate the U.S. territory’s debt, while maintaining its warning that the so-called tax reform cannot affect the Treasury revenues. The Board’s legal advisor, Martin Bienenstock, told Judge Laura Taylor Swain that the federal entity expects the quasi chapter 9 plan of debt adjustment of the Puerto Rico Sales Tax Financing Corporation (COFINA) assumes court approval by next year. In addition, Mr. Bienenstock revealed that, to date, the PROMESA Board has initiated talks or is in negotiations with creditors of other utilities which are not part of the bankruptcy process, such as the Puerto Rico Public Buildings Authority and the Aqueduct and Sewer Authority (PRASA). He said that he anticipated that debts, such as that of the University of Puerto Rico, could be addressed under PROMESA’s Title VI, noting that: “If nothing bad happens, we hope that the COFINA plan can be confirmed by January 2019.” Mr. Bienenstock’s comments regarding Puerto Rico’s debt renegotiation process occurred one day after Judge Swain had approved the qualified plan to renegotiate the Government Development Bank debt through Title VI of PROMESA. Indeed, after describing the court’s endorsement of the GDB qualified modification as “a big step,” Mr. Bienenstock indicated that the next transaction that may be submitted to court would be the Electric Power Authority (PREPA) case, as he provided assurances that the legal matters are moving “in parallel.” According to Mr. Bienenstock, PREPA owes about $147 million on a loan to the General Fund and is making payments as per its agreement. In addition, he explained the PROMESA Board is in negotiations those creditors who, last summer, had signed a Restructuring Support Agreement, as well as with municipal insurers that guarantee that debt.

At the same time, in explaining and responding to the request of qualifications process for private generation that the government recently announced, Mr. Bienenstock assured that PREPA privatization is also progressing. If the GDB restructuring is completed, the COFINA adjustment plan is approved, and an understanding is reached with regard to PREPA; the PROMESA Board would renegotiate most of the $45 billion of the Puerto Rican public debt which is currently in court, whether under PROMESA Title III or Title VI, which provides for voluntary agreements.

This all comes as the PROMESA clock is beginning to wind down: the PROMESA Board members complete their term next September, unless, of course, the new Congress, after it is sworn in and begins its new term next January, opts to make changes with either the PROMESA Board, or the underlying statute.

PROMESA Board Executive Director Natalie Jaresko noted: “The Court’s approval represents a major milestone in the restructuring of Puerto Rico’s debt obligations…We congratulate the government of Puerto Rico for their effort and look forward to our continued efforts to achieve other consensual deals.” The agreement marked the first time Judge Swain has approved a debt restructuring for a commonwealth entity. Puerto Rico is seeking to reduce most of its $74 billion of debt. The federal board has filed documents to the court seeking a write down of the island’s sales-tax bonds. Officials are also working on restructuring Puerto Rico’s general obligations and debt sold by its main electric utility.

The bank served as a fiscal adviser to the territory’s government. It also allowed Puerto Rico to rack up debt by extending loans to cover the commonwealth’s operating expenses. Under the provisions, municipal bondholders would receive 55 cents on the dollar for new bonds with an interest rate of 7.5 percent. GDB bonds maturing in 2023 traded Tuesday at an average price of at 48.5 cents on the dollar, according to data compiled by Bloomberg.

Vote Early & Often: the Trials & Tribulations of Fiscal Recovery

November 6, 2018

Good Election Day Morning! In this morning’s election eBlog, we roll the proverbial fiscal die in Atlantic City as the post-state taken over municipality continues its recovery from a near chapter 9 municipal bankruptcy, and then we zoom south to consider the ongoing governance challenges affecting Puerto Rico and its fiscal condition.

Fiscal Mo. Maybe anticipating the cold and miserable rain, more than half a million Garden State voters requested vote-by-mail ballots for today’s election, but whatever the case, Atlantic County, Ocean County clerk’s offices announce extended hours. Mayhap it is a positive reaction to the remarkable fiscal recovery, after, this week, Moody’s made a positive bet on the city’s fiscal future, raising the city’s credit rating and assigning it a positive outlook, citing an improved casino industry and ongoing efforts to diversify Atlantic City’s tax base. The Moody’s boost came just three weeks in the wake of Standard & Poor’s upgrade of the city’s general obligation municipal bonds, assessing the improvements which the rating agency credited largely to fiscal improvements achieved under state oversight—or, as analyst Douglas Goldmacher wrote: “The new B2 rating reflects the city’s continued but reduced financial and economic distress…The rating is also informed by the material budgetary improvements and especially by the continued, strong oversight by the State of New Jersey.” The fiscal upswing marked the first time Moody’s has rated Atlantic City at a B level since a steep downgrade three and a half years ago in the wake of former Gov. Chris Christie’s six-notch downgrade to Caa1 from Ba1 after former New Jersey Gov. Christie hired an emergency manager to oversee city finances. Moody’s, a year and a half ago, made deeper credit rating reductions, some seven months prior to the state takeover. Even today, notwithstanding the city’s remarkable fiscal turnaround, Atlantic City’s current municipal credit rating remains well below investment grade and subject to high credit risk.

Nevertheless, the credit rating upgrade is based upon Moody’s assessment that the city’s ongoing ongoing efforts to diversify Atlantic City’s tax base, the recent and improving health of the casino industry, and the successful implementation of the casino payment-in-lieu-of-taxes program have all contributed towards the improved rating—or, as Mayor Frank Gilliam put it: “The Moody’s credit upgrade is one more step in the right financial direction for Atlantic City…We still have a lot of work to be done, but the City of Atlantic City looks forward to continued growth.”

It appears at least some of the credit for the fiscal turnaround was what Gov. Phil Murphy and Lt. Gov. Sheila Oliver described as “our collaborative and cooperative approach to turning Atlantic City around was the right path to take,” noting they were “committed to working with local leaders to ensure the city’s long-term sustainability and financial viability.”

In rolling the fiscal dice, others also credit the Casino Reinvestment Development Authority (CRDA), which, just a couple of years ago, had millions to invest in projects to reinvigorate Atlantic City and other parts of the state—that is until its $22 million a year in casino investment alternative taxes was taken to help pay down the nearly chapter 9 city’s debt. No doubt, that fiscal safety net contributed to, earlier this month, Gov. Murphy’s signing legislation to add a 1.25 percent tax on sports betting revenue in the state. The CRDA will receive the fiscal resources from bets placed at casinos and online, while those placed at the two state racetracks will generate funds for their host municipalities. Although that is a reduction from the levels the CRDA used to receive; nevertheless, when added to its existing funds from luxury taxes and room and parking fees, it will be significant. Unsurprisingly, Mayor Gilliam, a member of the CRDA board, is not excited about seeing “revenue generated in Atlantic City going to a state agency, when it could have been used to help the city.” But partnership has value: in the case of Atlantic City, the CRDA has financed summer police to supplement the city force, for the repaving of some city streets, and for many improvements to the city’s Tourism District. This month it began preparation to fund marketing initiatives, including consideration of as much as $1.4 million to support a bid by Meet AC, the productive city marketing and promotion agency it partly funds, to secure the Connect Marketplace Convention for 2020—a gathering of trade show and conference organizers and officials which could serve as a gateway to increasing that lucrative part of the city’s vital visitor market.

Plans of Debt Adjustment. Unlike a plan of adjustment in a chapter 9 municipal bankruptcy, where a federal court acts as a referee, the PROMESA law for Puerto Rico imposed an oversight board, which, just days after having certified a new fiscal plan for the U.S. territory, has launched a platform on the internet to ensure that the Puerto Rican government implements the document with which, at least according to the Oversight Board, would correct the fiscal calculations the Board believes led to the quasi chapter 9 bankruptcy. Here, this will be the tool used by the Board’s executive director Natalie Jaresko and her team to ensure that Gov. Ricardo Rosselló Nevares’ administration complies with the five-year Fiscal Plan which had been approved last Tuesday by the Board, notwithstanding the warnings of the Puerto Rico representative before the Board, Christian Sobrino Vega, who said that the approved plan is not enforceable.

In its proposed imposition and preemption, the PROMESA Board noted: “The full implementation of certified fiscal plans is necessary to place Puerto Rico on track to achieve the objectives set forth in the federal PROMESA law,” with the portal structured in two parts: One seeks to establish if the government of Puerto Rico has presented the necessary strategies to enforce the Fiscal Plan. (In this regard, the analytical tool states that until this month, the Board had received some 89 implementation plans, while another 40 would remain pending.) The system allows verification of compliance by each government agency, as well as the Senate, the House, and the Judicial Branch. The second part seeks to document whether the government of Puerto Rico is in compliance with the mandate to submit financial statements, such as liquidity reports, pension payments, and a comparison charts between projected and current spending. (Note: as of this week, the website indicated that 77 percent of the required reports had been filed.)
This week, Executive Director Jaresko said that the Board will follow-up on 128 measures related to the operational changes that the government should apply, ranging from the closure of schools and simplifying hiring processes, to mechanisms aiming at consolidating administrative operations, reporting that, of that total, only about four initiatives were in progress. One might term this as being over one hundred unfunded mandates. In the wake of, last week, the Board certification of the new formula for government expenses and collections, Gov. Rosselló Nevares anticipated, unsurprisingly, that he would not implement the unelected Board’s fiscal recipe, deeming it an unnecessary dose of “austerity” if economic improvement is considered.

Meanwhile, during the meeting where the PROMESA Board certified the Fiscal Plan, Sobrino Vega, an attorney who has served as a Director at the Government Development Bank for Puerto Rico since February of last year, and serves as its President, made clear he would not accept the new demands of the Board, because it was an exercise that would result in “failure,” noting the document contains projections of collections and changes in government operations which are simply infeasible. Further, he recalled that, a year ago, the Board had claimed that it would be necessary to implement a furlough plan, because the Puerto Rico Treasury would run out of money‒something which did not happen.

Micromanagement. Part of the problem appears to be that, unlike in a chapter 9 municipal bankruptcy, where a federal judge acts as a neutral arbiter, there is a sense that the PROMESA Board is more like a dictator than a neutral arbiter. That is, instead of, as federal bankruptcy courts do, approving or not approving a plan of debt adjustment, the Board here appears determined to impose its own plan. Having rejected the tax reform bill passed by the Legislature had passed, asserting it would push Puerto Rico off the road to a balanced budget, Puerto Rico House of Representatives President Carlos Méndez Núñez said he would like to meet board Executive Director Natalie Jaresko to discuss the PROMESA Board’s objections, after Puerto Rico Oversight Board Executive Director Natalie Jaresko rejected the tax reform bill passed by the legislature as inconsistent with the approved fiscal plan. Subsequently Puerto Rico Gov. Ricardo Rosselló said that he was willing to meet with the PROMESA Board and legislative leaders about the legislature-passed tax reform, according to El Vocero; however, he said that the tax reform would go ahead in its already voted-on form. Nevertheless, in response, in a letter to Gov. Méndez Núñez, and Senate President Thomas Rivera Schatz, the Board interjected that the reform was inconsistent with their Oct. 23-adopted fiscal plan—a letter which, unsurprisingly, drew a response from the Governor’s representative, Christian Sobrino Vega, that the PROMESA Board’s criticisms of the bill were unfair and/or inaccurate.
In its Friday letter, the Board ordered that the tax initiatives must be implemented with revenue-positive measures, preceding the revenue-negative ones, so as to be sure the revenues from the first will be adequate to cover the losses from the second. Second, the Board mandated that the assumed new sources of revenues have inadequate allotments for behavioral, economic, demographic, substitution, and implementation risks. Third, the Board called for explicit limits on the granting of tax credits and the restoration of the Tax Credits and Disbursements Authorization Committee, which the current bill eliminates. Fourth, the Board objected to several measures in the bill, warning that the bill’s plan for introducing taxed video lottery machines as a source of revenue could “cannibalize” existing fiscal plan revenues, writing that the Puerto Rico Department of Treasury should not be granted the authority to waive taxes and fees after the department declared an emergency, complaining that the local officials had failed to respond to the Board’s multiple requests for data to confirm the bill’s revenue neutrality. In addition, the Board said the current bill also has poorly designed features, asserting, for example, there would be increases to a 4% rate in business to business sales taxes from 0% when a business’ revenue exceeds $200,000. The bill would include a jump in rates when service provider’s income goes over $100,000. These provisions, according to the PROMESA Board, “will inevitably generate significant incentives to avoid, misreport, and evade the payment of taxes due.”

In his response, Mr. Sobrino Vega wrote that the PROMESA Board, in bringing up the bill’s shifts in tax rates depending on amounts of businesses’ revenue or service providers’ incomes, had failed to mention that taxpayers have the option of continuing with the regular tax regime, adding that the bill is “still consistent with the fiscal plan as the implementation of tax law initiatives occurs sequentially.” Mr. Vega has expressed apprehension that Ms. Jaresko has not adequately considered the impact of the administrative provisions in improving tax compliance and thus increasing revenues, noting that he believed the most “critical changes” are revenue neutral.

Seeking Shelter from a Chapter 9 Storm


November 5, 2018

Good Morning! In this morning’s pre-election eBlog, we return to Jefferson County, Alabama, as it remains burdened by a seemingly Don Quixote type dogged quest challenging the county’s chapter 9 municipal bankruptcy plan of debt adjustment. This challenge demonstrates the lingering costs to county taxpayers and to services to county residents.   

The Steep Road to Emerging for Municipal Bankruptcy. After, last August 16th, the U.S. Court of Appeals for the Eleventh Circuit issued an opinion in the Bennett v. Jefferson County Commission case wherein the group known as the Ratepayers filed an appeal challenging Jefferson County’s municipal Bankruptcy Plan of chapter 9 Adjustment, that court has rejected any rehearing of such an appeal. Noting that it has considered the factors relevant to equitable mootness, the court determined that its dismissal of the appeal was appropriate, thereby reversing the U.S. District Court’s decision, and remanding it for dismissal of the Ratepayers’ appeal—a decisions which Jefferson County Commissioner Jimmie Stephens deemed as “unfortunate that these rulings are not accepted by the plaintiffs.” Needless to write, the cost for the County to defend itself precludes investment in vital services—or for providing options to reduce County taxes. The decision came in response to Calvin Grigsby, an attorney representing a group of ratepayers on the Jefferson County’s sewer system, who, in his most recent brief, asserted the judge panel of the federal circuit court had failed to consider constitutional issues when the court reversed a lower court decision, effectively ending the ratepayers’ appeal. Mr. Grigsby had requested an en banc rehearing in the case before the entire panel of the 11th U.S. Court of Appeals, stating: “The en banc review is extremely important given the actions of the County and the bankruptcy court to deprive the ratepayers of their day in court on their well-documented proof of claim.” Here, Mr. Grigsby, in his 180-page filing, asserted that the three judges who had presided had failed to consider constitutional issues. Given his quasi Don Quixote quest, it appears unsurprising that he now vows he will appeal to the U.S. Supreme Court, asserting: “I am going to make one last try at the Supreme Court, because the ‘prudential doctrine’ of ‘equitable mootness’ should never be allowed to deprive consumers of public utility services of their property rights and constitutional rights without a hearing on the merits of their claims.”

The equitable mootness doctrine promotes finality, and it protects parties which have justifiably relied on a U.S. Bankruptcy court’s confirmation order and transactions effectuated pursuant to that order. In deciding whether to dismiss an appeal of a confirmation order as equitably moot, courts consider some or all the following factors:

  • Whether the appellant has sought or obtained a stay;
  • Whether the plan of reorganization has been substantially consummated;
  • The effect the requested relief would have on the rights of third parties not before the court;
  • The impact the requested relief would have on the likelihood of successful reorganization; and,
  • Public policy concerns.

Typically, the burden to prove equitable mootness falls on the party seeking dismissal of an appeal; however, in the U.S. Court of Appeals for the Second Circuit, the appellant must overcome a presumption of equitable mootness when a plan of reorganization has been substantially consummated. And, overcoming such a barrier, as Jefferson County Commission President Jimmie Stephens noted last week, is steep, adding: “It is unfortunate that these rulings are not accepted by the plaintiffs…I would expect the plaintiffs to continue the appeal process to the Supreme Court. I would also expect that to be denied.” (Jefferson County filed for Chapter 9 reorganization on Nov. 9, 2011, and, in a relatively short time, emerged from chapter 9 bankruptcy in December of 2013 after closing on $1.8 billion of 40-year sewer warrants to write down $3.2 billion of old sewer debt, resulting in an overall 40% haircut to bondholders.

Mr. Grigsby claimed that because a portion of the 2013 deal used capital appreciation refunding bonds, it will require paying principal and interest of $6.6 billion, compared to $1.4 billion in interest on the $3.2 billion of debt the county shed in the restructuring, noting: “So the bankruptcy increased the pre-petition $4.6 billion in debt to $6.6 billion without raising any new money for projects,” adding: “Bankruptcy is supposed to reduce debt not increase debt.” In addition, Mr. Grigsby noted he does not believe Jefferson County, much less the U.S. bankruptcy court understood the back-end loaded structure of the deal, noting: “Under recent amendments to the (IRS) tax code, there are no more tax-exempt advance refundings.” Thus, he added, “The ratepayers are stuck with this unconscionable deal.” Unsurprisingly, he omitted mention of the horrendous litigation costs his efforts are imposing on Jefferson County’s taxpayers.

The county, the nation’s most populous, and a county established in 1819 in honor of one of the nation’s founding fathers, Thomas Jefferson, with a population near 660,000, with its county seat in Birmingham, experienced rapid growth as an industrial city in the 20th century, based on heavy manufacturing in steel and iron.

In the 1990s, Jefferson County authorized and financed a massive overhaul of the county-owned sewer system, and, in doing so, increased water and sewer rates, over a decade and a half period by some 300%, that is to levels causing severe problems for low income families. Moreover, as mayhap befits the nature of sewers, the costs for the project increased due to financial and fiscal problems, not to mention ethical sewage: county officials, encouraged by bribes by financial services companies, made a series of risky municipal bond-swap agreements. Two extremely controversial undertakings by Jefferson County officials in the 2000s tallied up to some $4 billion in debt, a level which began to trigger its chapter 9 municipal bankruptcy. Unsurprisingly, for what was, at the time, the nation’s largest ever municipal bankruptcy, federal prosecutors smelled a proverbial rat leading to findings that “six of Jefferson County’s former Commissioners” were found guilty of corruption for accepting bribes, along with 15 other officials.” Thus, seven years ago, overwhelmed by water and sewer debt of $4.2 billion, the County filed for chapter 9 municipal bankruptcy, opening up a virtual Pandora’s box of fiscal and financial problems related to costs of a huge sewer project—and corruption involving six County Commissioners. At the time, as we have noted, it was the largest chapter 9 filing in U.S. history, before it was eclipsed by Detroit. Nevertheless, in a relatively short time, the U.S. Bankruptcy Court provided is approval of the County’s plan of debt adjustment in December of 2013—a plan under which the County slashed expenses and eliminated some 700 positions, and, under which, it wrote off in excess of $1.4 billion in municipal debt, as well as paid premiums for early call provisions on all six series of sewer warrants that the County had sold.

Nevertheless, the case remained alive, because of the plaintiffs’ appeal, making it one, as the nation’s godfather of chapter 9 municipal bankruptcy, Jim Spiotto put it, of the longest ongoing chapter 9 cases among large municipalities.

With U.S. Circuit Judge Adalberto Jordan writing for the court, Judge Jordan focused on the fact that the ratepayers did not seek a stay to delay the implementation of the county’s chapter 9 bankruptcy plan after U.S. Bankruptcy Judge Thomas Bennett confirmed it on Nov. 22, 2013. Soon thereafter, (less than two weeks) the County;s plan of debt adjustment was approved, and Jefferson County closed on new sewer warrants in an arrangement which included a rate covenant, as well as a provision mandating that the federal bankruptcy court retain jurisdiction over the case with the power to ensure that Commissioners increase sewer system rates at levels that will service the debt over the life of the warrants. Thus, here, the plaintiffs filed their appeal citing several constitutional violations, including the plan of debt adjustment’s provision allowing the U.S. bankruptcy court to retain jurisdiction, even though they did not request the customary stay to prevent the confirmation plan from being implemented.

In its decision, the court, however, wrote: “The relief sought here, even if limited to striking the provision giving the bankruptcy court jurisdiction with respect to future rates, would seriously undermine actions taken in reliance on the confirmation order…We think it is fair to assume that, at the very least, whoever ultimately held those warrants would be adversely affected.” Or, as Commission President Stephens put it: “It is really time that we put this chapter behind us and work together for the future of our great county…Our county and its sewer system are doing great.”

Coming Out of the Chapter 9 Municipal Repair Shop

November 2, 2018

Good Morning! In this morning’s eBlog, we report on the Motor City’s return to the municipal capital markets.  

Perhaps as befitting the week of Halloween, Detroit has both a treat, but also some very scary news. On the plus side, the Motor City is planning its return to the nation’s municipal market by end of this year, marking or celebrating its first stand-alone issuance of municipal bonds since its historic 2013 Chapter 9 municipal bankruptcy filing. The City Council has authorized a total of $255 million in tax-exempt bonds over the next five years to finance capital projects; in addition, the city plans to issue $112 million of new money unlimited tax general obligation bonds by December; the remainder will be issued in 2021. Detroit CFO John Hill noted: “We think it is important for the city to get back into the market on its own credit,” as the issuance before Christmas will mark Detroit’s first in eight years without some form of state support, or, as he added: “We are not enhancing that borrowing; it will be on the city’s credit…We think it is important for the city to get back into the market on its own credit.”

Although the city is still encumbered with a junk rating in the wake of U.S. Bankruptcy Judge Steven Rhodes’ approval of the city’s 2014 plan of debt adjustment, last May, Moody’s Investors Service upgraded the city’s issuer rating to Ba3 from B1, assigning a stable outlook. CFO Hill reports the Motor City is working on its investor push, so officials will go to Chicago and Boston to market the new debt issuance, with Mr. Hill reporting Detroit is prepared to pay interest rates ranging from 5.5% to 6% on the municipal bonds. Crack municipal analyst Lisa Washburn, a Managing Director for Municipal Market Analytics, noted: “Detroit probably should be issuing bonds given the current market context…I suspect that the bonds will be well-received by investors notwithstanding their abysmal treatment in the city’s bankruptcy. Buyers should probably consider that history when making their investment decision. But, market participants are likely to worry about the future later.” Howard Cure, the Director of municipal bond research at Evercore Wealth Management, said the Motor City should not have to pay an exorbitant interest penalty: “I still think that since rates are still relatively low, there will be enough interest from investors to make this a successful deal.”

Nevertheless, as befits this week of Halloween, Ms. Washburn believes Detroit is still confronted by long-term credit risks, especially due to its weak demographics, questions with regard to its ability to sustain economic growth, a coming pension funding increase, and concerns that the state may cause problems for the city. In addition, there remain  apprehensions about the city’s public schools, which continue to hinder incentives for families with young children to move into the city. For his part, Mr. Cure notes that from a municipal investor perspective: “An investor is essentially making a bet that the strong financial policies implemented by the city will remain in place even under a new administration…Also, that the city addresses its underfunded pensions and continues to grow economically. Based on the current trajectory, I think the bet is that the city could eventually return to investment-grade ratings. [But] That is in no way assured.”

Mr. Hill notes it is possible Detroit would also look to do a refunding on some of the Motor City’s limited tax general obligation bonds by the end of the year, stating: “We are not sure what the sizing on that is going to be, because we need to get a sense on the interest we have on it: If there is a lot of interest, then it makes sense for us to takeout more than less.” (The city is authorized to issue up to $500 million in limited tax general obligation bonds for the purpose of refunding or refinancing all or a portion of the Detroit’s existing such municipal bonds, which include $245 million of income tax-backed bonds, $360 million of 1st and 3rd lien distributable state aid-backed bonds, and $632 million of B Notes.

The Judgement of Solomon?

November 1, 2018

Good Morning! In this morning’s eBlog, we report on the implications of municipal divorce—only divorce here referring to a voters’ decisions to try to divide a municipality into two.

Splitting Municipalities? In the Hebrew Bible, in which Israel’s King Solomon ruled between two women who each claimed maternity of the same child, King Solomon suggested to them cutting the baby in two, allowing each mother to receive half–a strategy he came upon to discern who the true mother was. Now, as we have explored previously, courts in Georgia are being asked to determine whether and how one municipality might be divided into two.

Communities hoping to create their own cities by breaking away from established municipalities may find the cost is steep in the wake of the recent Georgia Supreme Court decision not to wade into the matter and rule with regard to halting a scheduled referendum in the wake of a federal court’s ruling. The issue, as we have previously noted, is over whether a new city of Eagle’s Landing should be created from part of the existing city of Stockbridge—a city beginning to celebrate its 100th anniversary. The Georgia General Assembly passed two acts, which the Governor, earlier this year, signed to create Eagle’s Landing from land which is currently part of Stockbridge combined with unincorporated portions of adjacent of Henry County. Now it is up to voters to approve; however, Stockbridge residents who live outside the boundaries of the proposed city will not have a vote; thus, unsurprisingly, opponents, including the Stockbridge mayor, say creation of a new city would take a significant amount of city’s land and tax revenue and harm the Stockbridge’s ability to pay municipal bond obligations. The City, Monday, hosted a post-legislative community meeting on the proposed de-annexation of city property, in the final informational session on de-annexation prior to the election next Tuesday, with the goal to share timely information related to the impact of the proposed de-annexation on local homeowners, businesses, and citizens of the State of Georgia.

Proponents of carving out a new city claim they want to secure better municipal services, increase property values, and attract high-end businesses. Opponents, however, charge that race is a factor: the suburb of Atlanta is predominantly black, while the city of Eagle’s Landing would have a higher proportion of white residents. The city has sued the Henry County Elections Director, as well as members of the Henry County Commission, and requested that a judge declare that the acts setting up the referendum violated the Georgia state Constitution—a request the judge declined; ergo, the city appealed to the Georgia Supreme Court, which heard arguments in the case last week. Attorneys for the city argued the acts violate the Georgia Constitution’s prohibition on legislation that “refers to more than one subject matter or contains matter different from what is expressed in the title thereof.” Here, one of the two acts provides for the incorporation of Eagle’s Landing; it does not mention Stockbridge, even though it takes that city’s land, while the second would draw boundaries for Stockbridge, but omits naming Eagle’s Landing.

Attorneys for the creation of Eagle’s Landing argued that the Georgia Legislature has the authority to de-annex land from Stockbridge and to create a new city and noted that lawmakers used two separate bills to do that; lawyers for Stockbridge had also filed a motion asking the Georgia Supreme Court to expedite the appeal or to halt the vote on the referendum. The court, Monday, denied the request in a 7-2 decision.

Stockbridge city attorneys, led by former Georgia Attorney General Michael Bowers, argued that Senate Bill 263, known in court as Act 548, was unconstitutional as it would revise the city of Stockbridge’s boundaries as well as provide for a new city of Eagles Landing, as parts of Stockbridge city limits are included in the act. However, Senate Bill 262, known in court as Act 559, deals specifically with revising the boundaries of the city of Stockbridge. Bowers argued that Act 559 would not come into effect unless Act 548 becomes law with an affirmative vote in the Eagles Landing referendum. The argument raised by Bowers was that Section 3-1 of Act 559 said it would only take effect provided a bill concerning Eagles Landing cityhood was signed by the Governor and the Eagles Landing referendum was approved by voters.

On the other hand, Eagles Landing proponents argued that both bills should be looked at together, with Eagles Landing attorney Tim Tanner arguing that Act 548 “shouldn’t be unconstitutional in a vacuum.” Mr. Tanner also argued that the two separate bills concerned two separate topics, with one bill concerning a referendum regarding Eagles Landing cityhood, and the other concerning the de-annexation of land from the city of Stockbridge. Nevertheless, with the ruling by the Georgia Supreme Court, the referendum will go forward, and if approved by voters in the Eagles Landing area, will create a new city of Eagles Landing effective New Year’s Day.

Winning in court, however, could prove costly: U.S. District Court Judge Leigh Martin May affirmed last week that if Eagle’s Landing prevails in its attempt to become a municipality via de-annexation and taking half of Stockbridge, it will inherit millions in municipal bond debt and other obligations contractually tied to the territory. In the decision, Judge May denied a preliminary injunction which would have delayed the election, writing that Capital One and Stockbridge had been unable to prove their underlying contentions.