The Road to Recovery from Municipal Bankruptcy

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November 12, 2015. Share on Twitter

The Road to Recovery from Municipal Bankruptcy. Jefferson County Commissioner David Carrington has put together a description what he labels “A Post-Bankruptcy Look at Jefferson County, Alabama” for a presentation at a Symposium on Modern Municipal Restructurings for Duke University this week to demonstrate the steps on the road out of what, at the time, was the largest municipal bankruptcy in U.S. history in Alabama’s largest county. Noting the county’s diverse economy, with a GDP ranking it 137th out of 3,134 counties, and its home to the Innovation Depot, the largest business technology incubator in the Southeast, as well as its robust rail and interstate transportation network, he pointed to last year’s 2014 new residential permits (in dollars) greater than 58 of Alabama’s—or some 19.2% of all the state’s 67 counties combined, as well as the balanced budgets the county has adopted each and every year since U.S. Bankruptcy Judge Thomas Bennett approved the municipality’s plan of debt adjustment. He also noted the county’s slimmed payroll: the county today has 1,000 fewer employees than when, 25 months after it emerged from municipal bankruptcy on December 3, 2013, adding the County long-term debt has declined by some $1.5 billion—more than one-third, and that the County has made significant structural changes, including closing an inpatient (not impatient) hospital, sold the nursing home assets, closed all four of its satellite courthouses, and achieved something which must make Chicago Mayor Rahm Emanuel most jealous: a county pension has a funded ratio of 105.6%. He reports that audits, which were three years past due when this Commission took office in 2010, are now actually published ahead of schedule. Mayhap one of the most important accomplishments might be a more constructive relationship with the Alabama Legislature, which has passed a replacement 1‒cent sales tax bill, an action which allows the County to refinance its school construction debt, a key step to providing additional funding for county operations, economic development, schools and community development, in addition to county debt retirement. On the economic recover front, the Commissioner reports that more than 1,300 condominium units are planned or under construction, along with a $30 million mixed use development in Midtown anchored by a 34,000 square foot Publix grocery store—and that new historic building tax credits enacted by the Alabama legislature have elicited more than $200 million in local investments in a metro region now ranked as the Top City for Millennial Entrepreneurs by Thumbtack, in addition to being ranked 6th overall and 5th for economic development potential among the Top 10 mid‒sized North, Central and South American “Cities of the Future.”

A Detroit International 911. Daniel Howes, the gifted Detroit News columnist and associate business editor, wrote a terrific column yesterday about Dovie Maisel, an Israeli architect for a cause called United Hatzalah, a network of trained volunteers in that country which responds to calls for emergency medical care in Israel’s largest cities and across the country — noting that Mr. Maisel is in Detroit as part of an international effort to work with Mayor Mike Duggan to see if the model could be replicated, with Mr. Maisel noting: “We are not coming to take any jobs. We are the community. We are coming to help them:” Detroit and its EMT units are in preliminary discussions with United Hatzalah to see if the Israeli concept, which is scheduled to be launched this month in Jersey City, New Jersey, could also be adapted for the Motor City—an audacious effort which is envisioned to complement, rather than compete with what Mr. Howes describes as Detroit’s “stressed EMT units.” The partnership would train community volunteers. Potentially it would create a cadre of skilled technicians who could apply for EMT openings in Detroit or the metropolitan region—with Mr. Maisel noting, carefully, that Hatzalah volunteers do not replace professional EMT units in Israel; rather, certified according to Israeli national standards, they are, nevertheless, often able to respond to emergencies more quickly, because they are embedded in their communities—so that they are closer. Indeed, the concept has similarities to the remarkable public safety partnership in No. Virginia, where a unique agreement between its local governments ensures that the first 911 response will come from the closest responder—irrespective of jurisdiction—an agreement which can make the difference between life and death—and, secondarily—savings. According to Mr. Maisel, in Israel, volunteers are not paid, and victims are not charged.

As Mr. Howes wrote: “It’s an audacious idea for Detroit, one Mayor Mike Duggan dismissed as fanciful in a city of 139 square miles with a population pushing 700,000 — until he heard the pitch and compared it to the city’s need to improve its response to emergency calls,” noting that in Israel, “a polyglot of ethnicity, religion and intermittent tension effectively bridged by United Hatzalah…a country of less than 8 million, the volunteer organization fields 700 emergency calls a day, carries 3,000 volunteers nationwide, and boasts an average response time of three minutes, even less in more densely populated major cities.” The organization use a fleet of 450 “ambucyles” volunteers use to answer calls, and counts 2,550 volunteer-owned vehicles that are used to augment its rescue fleet, adding: “With a budget of $10 million, all of it privately funded, Hatzalah maintains 40 branches across the country organized into eight districts — its volunteers treat victims regardless of ethnicity, sex or religion, with an ‘ultimate goal to save lives, to take the community and train them at all levels.’” As Mr. Howes writes: “This may be the right cause at the right time for Detroit. It could answer a public need, could ease pressure on EMT units, could teach volunteers from the city’s neighborhoods marketable skills, could tap an entrepreneurial vein in a (Mayor) Duggan administration generally open to alternative solutions, and could be funded by individual private donors and foundations”—especially in a city beset by an emergency response rate being among the lowest in the country. In this fascinating cross border effort, the Detroit Medical Center and Henry Ford Health Systems’ chief of emergency medicine are working with the Mayor’s office to assess the implications of trying to implement this potential international partnership—one which Mr. Howes forthrightly describes as “fraught with legal and medical issues, as well as reassuring union EMTs that the effort is not a back-door gambit to eliminate their jobs.”

Looming Default. The U.S. territory of Puerto Rico could default at the end of the month on at least a portion of its scheduled debt service payments—an event which would constitute its second default, as the island’s liquidity pressures increase: it upcoming fiscal obligations consist primarily of $354.7 million of debt service on notes issued by the Government Development Bank or GDB, which has less incentive to make a payment of $81.4 million in debt service on non-general obligation-backed debt, as the payment pledge does not benefit from constitutional protections. The greater sustainability risk is that the GDB may be forced to default also on the $273.3 million of GDB notes which are backed by Puerto Rico’s full faith and credit general obligation guarantee—a default, after all, which would likely trigger legal action—but an event long foretold: as Puerto Rico, without access to the kind of federal bankruptcy options available to municipalities across the rest of the U.S., but with a seemingly disinterested Congress, will have little option but to not make full faith and credit bond payments that would jeopardize essential government services, consistent with the rapidly approaching reality that “the Commonwealth cannot service all of its debt as currently scheduled.” Puerto Rico’s ability to meet any of its obligations is deteriorating, even as, like Nero, Congress fiddles.

The territory, absent access to external sources of financing, projects a negative $29.8 million cash balance this month, growing to a deficit of $205 million by next month. Even though some recovery is projected in early 2016 with the enactment of emergency liquidity actions, actions which could include utilizing tax revenues currently assigned to one or more government authorities and further delaying tax refunds, Puerto Rico’s November Financial Information and Operating Data cash projection report does not include any availability of funds at the GDB, noting its cash resources “may be fully depleted by the end of calendar year 2015.” Puerto Rico’s inability to sustain sufficient liquidity to meet its operating and debt needs, absent extraordinary measures or outside help or legal recourse, is now expected to lead to additional defaults. Even though, a government aide stated that Puerto Rico will make its scheduled December payment on GO guaranteed GDB debt, such payment will decrease what might be available for an approximately $330 million GO debt service payment due on New Year’s Day: that is, as Bloomberg noted: “While we expect the commonwealth to use all available measures to prevent a default on constitutionally protected debt, it has not been making the monthly sinking fund payments required for the 1 January payment since July 2015. Instead, it will rely on cash on hand in the Treasury’s single cash account to make the debt service payment, though as noted above the projected November and December balances in the fund are negative. The commonwealth is not eligible to file for bankruptcy and the absence of a debt-restructuring framework heightens risks to creditors because it prevents the government from using tools generally available to distressed corporations and some municipalities.” For his part, Puerto Rico Gov. Alejandro García Padilla the day before yesterday warned that if the island’s municipal bondholders do not agree to new terms on their debt, he will choose to pay for the needs of the people before paying the Commonwealth’s creditors: “…if they do not negotiate and force me to choose between creditors and Puerto Ricans, I’m going to pay the Puerto Ricans.’”

Providing Essential Services. Governor Alejandro García Padilla has said he will consider cutting hours for public workers to keep essential governmental services and functions running; he has already closed some schools, delayed tax rebates, and suspended payments to government suppliers. The Obama administration, lacking any constructive Congressional role, has, via the Treasury Department, proposed an assistance package that would sustain the island’s medical system by increasing reimbursement rates for Medicaid, which serves 46 percent of Puerto Ricans and is paid at rates 70 percent lower than in any U.S. state, according to the Puerto Rico Healthcare Crisis Coalition, a group of doctors, hospitals, and insurers. The proposed package would also offer some bankruptcy protections to help the government restructure more than $70 billion in debt—more than any state’s except New York and California. In return, under the proposal, Congress would gain more say over the island’s finances. Congressional leaders, however, report they will not agree to provide either any fiscal assistance—or municipal bankruptcy authority—unless Puerto Rico provides audited financial statements giving a complete picture of its finances, a challenge given that the self-governing U.S. territory missed a self-imposed Oct. 31st deadline for submitting statements from FY2014 and has yet to prepare FY2015 documents. Congress appears to want to impose a different standard than used for states with regard to chapter 9 municipal bankruptcy or other U.S. corporations, with Chairman Charles Grassley (R-Iowa) of the Senate Judiciary Committee claiming he “is waiting for some good-faith effort from Puerto Ricans.”

The Steep Road to Recovery from Municipal Bankruptcy

October 7, 2015

The Hard, but Critical Road to Recovery & Fiscal Sustainability. Few municipalities, especially compared to other corporations, go into bankruptcy. But for those that do, they do not disappear, as is the outcome in many corporate bankruptcies; rather they do not miss a beat with regard to providing essential services, even as they began the long and expensive process of putting Humpty Dumpty back together again by means of assembling a plan of debt adjustment in negotiations with their thousands upon thousands of creditors. While each of those plans must receive approval from a federal bankruptcy court—and the respected and respective judges do look to see that such proposed plans incorporate long-term fiscal sustainability provisions; nevertheless, those municipalities are not starting on a level playing field. So the question with regard to their ability to fully recover remains a story to be learned—because never before in American history has there been such a spate of major municipal bankruptcies. Ergo, unsurprisingly, Detroit—with its plan approved and the Mayor and Council restored to governance authority—in effect starts at a disadvantage compared to other municipalities: its road to climb is steep.

There is good news, however: a new report, “Estimating Home Equity Impacts from Rapid, Targeted Residential Demolition in Detroit, Michigan: Application of a Spatially-Dynamic Data System for Decision Support,” from the Skillman Foundation, Rock Ventures LLC, and Dynamo Metrics has found that the valuations of homes within 500 feet of a demolition funded by the U.S. Department of Treasury’s $100 million in Hardest Hit Funds have increased by an estimated 2.4 percent between December 2014 and May 2015. Indeed, blight removal has been a core element of any route to Motor City recovery: in May of 2014, the Detroit Blight Removal Task Force — which includes representatives from Detroit Public Schools, U-SNAP-BAC Inc. and Rock Ventures — identified more than 78,000 properties in need of sales, repair, or demolition. That is, federal help seems to have sparked a critical revival of affected assessed property values and, ergo, the Motor City’s revenues: the report found demolitions have increased the value of surrounding homes within 500 feet by 4.2 percent, or an average of $1,106. Citywide, that amounts to an increase in home values of more than $209 million. The bad news is that even as this innovative federal program is beginning to demonstrate its ability to contribute to Detroit’s comeback, the assistance in financing the demolition is drying up.

The report also suggests that combined with other efforts by the city—efforts which include code enforcement and sales of public assets such as side lots—have also begun to make telling fiscal differences: the value of homes nearby increased by 13.8 percent, or an average of $3,634. Citywide, that amounts to an increased assessed property value of about $410 million—or as Mayor Mike Duggan describes it: “The numbers are extraordinary,” noting that eliminating blight has allowed “good homes and good vacant homes” to increase in value: from January of last year until last, 5,812 blighted structures in the city were demolished thanks to funding from the federal “Hardest Hit” fund—a now drying up fund focusing nearly $8 billion in post Great Recession assistance foreclosure prevention in 18 states, including Michigan, with where Michigan’s share was over $498 million, of which Detroit received just over one fifth. Because those funds will be depleted this year, Mayor Duggan is planning to travel to Washington soon to meet with White House officials and others to lobby for the next round of money—especially since the demolitions to date have only addressed some 10 percent of the city’s blight.

Good Gnus. In its review of Chicago’s proposed FY2016 Budget, Kroll Bond Rating Agency (KBRA) reports it believes Mayor Rahm Emanuel’s budget includes “reasonable actions for closing the projected fiscal 2016 operating shortfall, and represents clear progress in confronting the challenges of unfunded pension liabilities.” The Budget closes the city’s FY2016 gap via proposed savings and reforms, efficiencies, and significantly increased property taxes from a four-year phased-in $543 million increase in the property tax levy, earmarked to specifically address rising police and fire pension liabilities. The rating agency wrote it believes the choice of a property tax levy increase demonstrates the Chicago’s political will to craft an effective and sustainable solution. Nevertheless, the agency noted there still remain numerous unresolved issues, which could potentially undermine budgetary goals: first, will the City Council, in an election year, approve the Mayor’s proposed budget? Second, the big shoulder city is relying on State action to increase the size of the home-owners property tax exemption, which would exempt homes valued at less than $250,000 from the increase—this a state legislature which is locked in a stalemate with the Governor. The phased-in property levy increases assume that Senate Bill 777, which reforms police and fire pension funding, will be enacted into law—and not be rejected by the Illinois Supreme Court. If not enacted, Chicago’s police and fire pension funding obligation would immediately rise from approximately $328 million to $550 million, and the city would have to identify and act on additional funding sources.

Not the Odor of Verbena. The Securities and Exchange Commission (SEC) has settled its almost six-year-old pay-to-pay case against two ex-JPMorgan bankers involved in hold-your-nose, soured sewer deals that thrust Jefferson County, Ala., into municipal bankruptcy. The SEC, according to a notice filed in federal court this week, reported it had reached agreement with Charles LeCroy and Douglas MacFaddin via mediation which resolves securities fraud charges against the two, albeit the actual terms of the settlement will not be made public until it is presented to the full commission for approval, with the independent federal securities agency advising the federal district court that, if the Commission approves the report, that would end litigation on the case. The long, simmering case dates back just about six years to when the SEC filed a civil suit alleging that Messieurs LeCroy and MacFaddin had improperly arranged payments to local broker-dealers in Alabama to assure that certain Jefferson County commissioners would award $5 billion in county sewer bond and swap deals to JPMorgan. The SEC suit, which charged that the two men “privately agreed with certain county commissioners to pay more than $8.2 million in 2002 and 2003 to close friends of the commissioners who either owned or worked at local broker-dealers,” sought declaratory and permanent injunctions against the two for federal securities law violations, as well as disgorgement of all profits they received as a result of their legal misbehavior, plus interest. The SEC had brought the suit simultaneously with its settlement of municipal securities fraud charges with the investment bank. Without admitting or denying the SEC’s charges, JPMorgan agreed to pay $75 million in penalties eventually turned over to Jefferson County, and to forfeit more than $647 million of claimed swap termination fees. In January, the SEC sought summary judgment in the case, leading U.S. District Court Judge Abdul Kallon to determine the five-year-old case was appropriate for mediation—this all in a case involving some nearly two dozen municipal elected officials, contractors, and county employees involved in Jefferson County’s sewer bond sales or construction of the sewer system who were jailed for bribery and fraud—and which led to what was, at the time, a filing for the largest municipal bankruptcy in U.S. history.

Wither Its Future—and Who Decides? Facing decades of structural budget gaps and unsustainable legacy costs, the City of Pittsburgh entered two forms of state oversight in 2004. In the subsequent decade, that engagement appeared to have been key to a turnaround in the city’s structural deficits, leading to annual positive fund balances, as the then-partnership helped restructure its crushing debt load, streamline an outsized government, and earn a triple-notch bond rating upgrade. Nevertheless, the Steel City still carried a $380 million pension liability, leaving questions with regard to whether the city was ready to graduate from state oversight – especially given the extra relief from restrictive state laws that the state’s Act 47 provides to city officials. Now that state-local tension seems to be back, with the Pennsylvania Intergovernmental Cooperation Authority (ICA), the city’s overseer, an authority state lawmakers formed in 2004 to oversee Pittsburgh’s finances, at a time the city was on the precipice of municipal bankruptcy, claiming it is justified by state law in withholding Pennsylvania gambling revenue from the city (ICA is invoking Act 71 of 2004, a state statute which grants, according to ICA, has “exclusive control” of the gaming revenues dedicated for Pittsburgh, the only second-class city under the commonwealth’s system of categorizing cities.), because, as the Intergovernmental Cooperation Authority’s Henry Sciortino, reports: “They haven’t met certain benchmarks.” Indeed, the former amity is now gone: Pittsburgh is suing the state agency in the Allegheny County Court of Common Pleas, accusing it of illegally withholding $10 million in annual gambling host city revenue funds the past two years related to the Rivers Casino—a costly dispute triggered by state agency claims that Pittsburgh Mayor Bill Peduto is backing off his commitment of $86.4 million to fully fund current payments to retirees – separate from the city’s overall unfunded pension liability estimated in the hundreds of millions. In addition, Mayor Peduto requested that Pennsylvania Auditor General Eugene DePasquale conduct an audit of the ICA—a request putting Mr. DePasquale now in a most awkward position in the wake of the city’s decision to file suit. Moreover, the city-state dispute—itself now becoming a costly court battle—arises even as the city faces daunting pension challenges: returns on the city’s employee pension funds have, according to the State Auditor, deteriorated from 16.3% in fiscal 2013 to 5.5% this year, reflecting the slowdown in financial markets, who estimates the city’s funds’ assets to be $675 million versus liabilities of almost $1.2 billion. Indeed, the Public Employee Retirement Commission considers Pittsburgh’s pension fund “moderately distressed.” In a letter to Gov. Tom Wolf and top legislative leaders a week ago, ICA Chairman Nicholas Varischetti called pension underfunding “one of the most serious barriers to Pittsburgh’s fiscal stability.” That statement comes in the wake of Pittsburgh’s efforts just five years ago to avoid a state takeover of its pension funds by earmarking nearly $750 million in parking revenues over three decades to prop its funding level above a state-mandated 50%. Keeping this growing state-local dispute constructive could matter: over the last decade, Pittsburgh has received 11 upgrades, most recently in early 2014 when S&P elevated its general obligation rating to A-plus, and Moody’s, just a year ago, revised its outlook to positive on the steel city’s general obligation bonds. The city’s suit alleges the ICA has been illegally withholding $10 million in annual gambling host city revenue funds the past two years, whilst, for its part, ICA officials claim Mayor Peduto is backing off his commitment of $86.4 million to fully fund current payments to retirees. Indeed, in an epistle to Gov. Tom Wolf, ICA Chairman Nicholas Varischetti wrote that pension underfunding was “one of the most serious barriers to Pittsburgh’s fiscal stability.” The state-local tension over the city’s pension liabilities is hardly new–five years ago Pittsburgh avoided a state takeover of its pension funds by earmarking nearly $750 million in parking revenues over 30 years to prop its funding level above a state-mandated 50%; however, once again, state apprehension is on the uptick that the city is, as one expert, David Fiorenza, a Villanova School of Business professor and a former chief financial officer of Radnor Township, said: Pa., said “[O]nce again the municipality is only fixing the leak and not curing the flooding problem of pension debt and other unfunded liabilities looming around like an albatross,” adding that he believes the state ICA can be a force to persuade cities to devote gambling revenues to other areas of the budget, such as pensions.

October 1, 2015

The Stress of Dysfunctional Governance in Municipal Bankruptcy. Last week, at a Governing panel I moderated in Washington, D.C., one of the questions I posed had to do with governance in municipal bankruptcy—a question I asked first of Kevyn Orr, the former Emergency Manger who steered Detroit through its long and complex process into and out of municipal bankruptcy: the differences and perspectives with regard to municipal bankruptcies in states which provide that the elected municipal leaders remain, such as in California and Alabama, versus the different laws in states such as Michigan and Rhode Island, where the Governor may opt to bring on a receiver (Rhode Island) or Emergency Manager, such as Gov. Rick Snyder of Michigan did in appointing Mr. Orr. In Central Falls’ municipal bankruptcy, the Governor named former state Supreme Court Judge Robert G. Flanders as Receiver – where, on day one, he ordered the Mayor and Council out of City Hall – and assumed total authority. Similarly, in Michigan, under the state’s law, Gov. Rick Snyder appointed Mr. Orr as the Motor City’s Emergency Manager—whereupon he took full power and authority for governance of the city—immediately upon his appointment. It was only on the respective federal bankruptcy court approvals of the two plans of debt adjustment that elected leaders (newly elected in the case of Central Falls) that governance reverted to those elected by the people. As we have noted, the model wherein a municipality’s elected officials remain in authority can work (please note, however, continuing challenges below in Jefferson County, Alabama), and in Stockton, California. But democracy in a crisis can sometimes be messy. Witness the imbroglio which is occurring in San Bernardino—now the city with the longest period in municipal bankruptcy in U.S. history, where recent events are painting a dismal picture of the city’s ability to operate and govern: there, in a late night and controversial decision, the city’s key consultant—who San Bernardino Sun insightful writer Ryan Hagen describes as “Arguably the only person with direct knowledge of much of the city’s complex redevelopment process,” was removed after serving nine “sometimes-controversial years at City Hall.” The removal of Jim Morris, who had been chief of staff during his father’s, Pat Morris, service as mayor, involved his work as a consultant on the dissolution of the city redevelopment agency: the issue before the Council was whether to extend his contract. Notwithstanding a 4-3 majority supporting a re-up of the contract, and a clear consensus by much of the city’s leadership, City Manager Allen Parker, City Attorney Gary Saenz, and Assemblywoman Cheryl Brown, who believe Mr. Morris was invaluable—Mayor Carey Davis vetoed any extension of his contract—citing concerns with regard to the delay in completing redevelopment tasks, particularly a long-range property management plan which had been projected to be finished last April, but which was not submitted to the Council until five months later. Mayor Davis noted: “If we’re paying for performance, it’s clear that maybe some of the delay was because concentration was taken from the (redevelopment agency) to city items.” According to Mr. Hagen, both messieurs Morris and Parker say the city made a plan which will allow it to meet state-imposed deadlines by moving in other people, with Mr. Parker writing: “Deputy City Manager, Bill Manis, who has been overseeing the team, will move into a more prominent role to continue the RDA dissolution process…Bill comes with extensive RDA experience and will work in tandem with the internal team and consultant, Urban Futures.” Nevertheless, the disruption comes as the city’s municipal bankruptcy creditors are making discovery requests—requests significantly above and beyond the normal obligations of a municipality, and requests which are increasing the workload for an already severely strained staff—a staff, after all, trying to operate and provide essential services, even as it is trying to marshal the resources to complete a plan of debt adjustment to the increasingly impatient U.S. Bankruptcy Judge Meredith Jury. All of this chaos, moreover, comes as voters are set a month from tomorrow to vote in the city’s election.

The Roots of Municipal Bankruptcy. According to the Detroit News, federal officials are investigating state Rep. Alberta Tinsley-Talabi (D-Detroit) who was a member of the Detroit City Council from 1993 to 2009 and served as a Wayne County Commissioner from 1987 to 1990. The investigation involves a bribery and kickback scandal which occurred during her years’ of service both as a Detroit Councilwoman, as well as a Detroit pension fund trustee. The News reports that Rep. Tinsley-Talabi’s nonprofit organization received at least one bribe from a businessman, during the time she was on a Detroit pension fund, and a time when her City Council campaign received thousands of dollars more from businessmen involved in a widespread corruption case, according to federal prosecutors. The allegations involving Rep. Tinsley-Talabi came out yesterday during the sentencing of a businessperson who had paid bribes to several former Detroit officials: no charges have been made yet in the widespread, years’-long federal probe of corruption at the Motor City’s City Hall, albeit there have been 38 convictions related to Detroit’s public pension funds, including former Detroit Mayor Kwame Kilpatrick and former City Council President Monica Conyers. The News also reported that federal court records clarify Rep. Tinsley-Talabi’s alleged involvement in a criminal case—a case which also has ensnared her former chief of staff, George Stanton, who will be sentenced today in federal court after agreeing to a plea bargain with prosecutors under which he agreed to secretly record conversations with Rep. Tinsley-Talabi and others. During her elected service in Detroit, Rep. Tinsley-Talabi, as a city pension trustee, had responsibilities to both oversee and help approve and select investments of said funds. She has founded a nonprofit group, Mack Alive, which serves the east side of Detroit. According to the News, in 2006 and 2007, when a Georgia businessman sought pension fund investments for his firm, Onyx Capital Advisers, and a real estate investment in the Turks and Caicos Islands on behalf of another company, PR Investment Group; the Detroit Police & Fire Pension Board, according to court records. On Dec. 21, 2006, then pension board member Tinsley-Talabi and other pension board members conditionally approved lending $10 million—an approval to which Detroit’s general retirement board approved another $10 million the following month. Now federal prosecutors allege that, within months, then Councilmember Dixon was handing out cash to city officials: “Evidence shows that Dixon gave the following things of value to Detroit and Pontiac pension trustees and staff in order to buy influence,” listing more than $244,000 worth of bribes, including a $1,000 check from Mr. Dixon to Ms. Tinsley-Talabi’s nonprofit on Aug. 22, 2007—perfectly timed just one day after the $1,000 donation. Further, the federal motion notes she introduced a favorable motion just prior to receipt of a $3,400 re-election campaign donation. In 2007, from Mr. Dixon—followed, just six days later by the Police & Fire pension fund’s grant of her request to have $1.15 million wired to Mr. Dixon’s firm, Onyx Capital Advisors. By December, 2007, the charges note Mr. Dixon paid for “City Official B,” referring to former Councilmember Tinsley-Talabi, to travel to the Turks and Caicos Islands—a trip which, the prosecutors note, two months later appeared to have some sway on her fellow pension trustees for a modified investment with PR Investment Group in the Turks and Caicos Islands, according to meeting minutes and court records. Ms. Tinsley-Talabi did not, however, vote on the proposed investment at the February meeting: she had left the pension board in December 2007 — the same month she took the Caribbean trip. The development came as Mr. Dixon yesterday earned a trip not to the Turks and Caicos, but, rather—in return for embezzling some $3.1 million from Detroit and Pontiac public pension funds, free lodging in federal prison for three and a half years for his role in the scandal, with the court finding he had paid $244,500 in bribes to former pension trustees, including the former Detroit City Councilmember and pension Board member—bribes for agreements which ended up losing the three public pension funds their entire investment of $23.8 million, according to the federal prosecutors. In all, Detroit’s pension fund appears to have suffered more than $95 million in a series of corrupt deals awarded to businessmen who bribed city public officials with cash, trips, free drinks, and other valuable items.

Municipal Bankruptcy Ain’t Over Until It’s Over. Jefferson County, Alabama, which—prior to Detroit—emerged from the largest municipal bankruptcy in American history, is finding that approval of its plan of debt adjustment by the U.S. bankruptcy court is not the last full measure: the county and its elected leaders confront a challenge or appeal to its plan of debt adjustment, creating hurdles to the County’s ability to issue municipal bonds. In addition, some restive opponents of the county’s approved plan of debt adjustment are also challenging court validation of a bond refunding—a refunding approved this year by the Alabama legislature—to provide the county with a source of new revenue. Such refunding revenues are needed to replace some 50 percent of the $70 million the County lost when a court struck down its occupational and business tax five years ago—a court decision which triggered the layoff of nearly 1,000 employees and significant cuts in public services. Jefferson County had filed for chapter 9 municipal bankruptcy in the wake of its inability to restructure $3.2 billion in its accumulated sewer debt. Under its court approved plan of debt adjustment, essential public services have been restored—but the county’s ability to issue bonds for key infrastructure investments and rehabilitation has been beset by ongoing legal challenges—or as the Bond Buyer’s inimitable Shelly Sigo writes: “[T]here isn’t funding for pent-up building, road and bridge repairs or improvements,” or County Commission President Jimmie Stephens noted yesterday: “We are getting the job done, but desperately need this revenue to improve the quality of life for our citizens…Our county buildings have deferred maintenance that needs to be addressed.” Notwithstanding, in a brief filed this week by Jefferson County tax assessor Andrew Bennett, state Reps. John Rogers and Mary Moore, and county resident William Muhammad, four of the 13 persons appealing Jefferson County’s plan of debt adjustment, claim Jefferson County’s claims are “belied by substantial fund balances” of $155 million in its FY2014 audit. In response, Commission President Stephens notes: “For anyone to state that the county does not need the funds, simply has not looked at our decaying infrastructure or simply doesn’t care,” with his statement coming as the County is planning its return to the municipal bond market for the first time since its successful exit from bankruptcy—planning to refund up to $595.5 million of warrants backed by a dedicated one-cent sales tax. Such a sale would provide for a refund a portion of the $1.05 billion of limited obligation warrants Jefferson County issued in 2004 and 2005, backed by the same dedicated sales tax—with the plan set so that the county could dedicate the proposed 40-year refunding plan to provide use sales tax proceeds to pay debt service, with excess tax revenues dedicated to Jefferson County’s general fund and unrelated county expenses such as schools, the Birmingham-Jefferson County Transit Authority, and the Birmingham Zoo—a plan authorized by the state legislature and signed by Alabama Governor Robert Bentley—but a plan for which the has filed a suit in Jefferson County Circuit Court in order to validate the refunding warrants and the state legislation—especially in the face of challenges that the law is unconstitutional.

The County’s fiscal challenges already confront legal hurdles from the two cases challenging its successful emergence from municipal bankruptcy—one by Jefferson County resident Keith Shannon, the other by Mssrs. Bennett, Rogers, Moore and Muhammad. In both cases, who argue the state legislation is unconstitutional. In addition, the attorney, financial advisor, and former broker-dealer, behind the challenge has also questioned Jefferson County’s need for new revenue, claiming if the proposed sales and use tax revenue is needed to fund infrastructure needs now, then the county misrepresented its insolvency before U.S. Bankruptcy Judge Thomas Bennett and its ability to pay the school warrant debt when it filed for bankruptcy, claiming: “The county having…$156 million in excess fund balance to pay school warrants and $155 million in unrestricted cash shows the bankruptcy was filed fraudulently,” he wrote in an email to the Bond Buyer. Ms. Sigo notes:

“Some market experts have suggested that Jefferson County faces a rocky return to the market given political undertones that led to its Chapter 9 bankruptcy, while others have suggested that any future deal might require extra credit support. The school warrants to be refunded later this year were untouched in the county’s bankruptcy. The case appealing the county’s bankruptcy exit involves only the county’s sewer debt. That case is continuing to move through the briefing stage before the 11th Circuit Court of Appeals in Atlanta. Jefferson County has asked the appellate panel to overturn a lower court judge’s ruling, which could result in revocation of a key credit factor supporting $1.8 billion in sewer refunding warrants the county issued in 2013 to write down $1.4 billion in related debt. The county’s reorganization plan authorizes the bankruptcy court to retain jurisdiction over the 40 years that the sewer warrants remain outstanding to ensure that the county provides adequate funds to pay debt service.”

September 30, 2015

The Stress of Democracy & Governance—and the Recurring Sins of the Past. Municipal bankruptcy and oncoming municipal elections make for governance challenges and hard votes. So it is that the San Bernardino City Council—by a one vote majority—passed a sewer rate increase (residents’ monthly sewer bills will rise $7.15 a month, starting in October–and increase more in future years). The narrow margin—a vote despite strong citizen opposition, swill trigger water and sewer collection fee increases, the first since 2010, which the department reported are necessary to avoid a sewer disaster in a system where holes have already been found and remain unfixed — and that is with only 20 percent to 40 percent of the 500 miles of pipes inspected. As the municipality’s water and sewer officials testified, the increase is critical, because the city’s “tires” could blow at any time, and replacing them after a blowout would only be more expensive. Moreover, as City Attorney Gary Saenz warned the elected leaders, not protecting and maintaining the system as required could lead to their prosecution and potential incarceration. Unsurprisingly, with elections looming now in less than five weeks, a stream of city residents (voters) urged the Council to reject the increase, claiming the rate increase was too much—and based on too little evidence. The ensuing 4-3 vote, nevertheless, means that the city’s sewer collection fee will rise about from $4 to $9 a month beginning tomorrow, then in July of every year until 2020, when sewer collection fees will total $11.47 for a single-family residence. The sewage-treatment fee, meanwhile, will rise 11.6 percent, to $20.65, effective tomorrow. By 2020, the total fee for single-family residences’ sewer collection and sewer treatment combined is projected to increase more than 50 percent from $22.50 to $35.32 a month. In adjusting the rates, the bankrupt city is restricted by California law, Proposition 218, which bars a municipality for setting or imposing fees higher than the cost of providing the service and restricts the revenues to a segregated account so that they may only be expended for related services. Notwithstanding the California law, prior to the city’s filing for chapter 9 municipal bankruptcy three years’ ago; in the lead-up to its 2012 municipal bankruptcy filing — San Bernardino officials who are now out of office did provided explicit details on the falsification of municipal budget documents—an admission which, at the time, led the then City Council members to delay a vote on whether to declare a state of fiscal emergency. (In California, a city must declare a state of fiscal emergency – the inability to pay its bills within 60 days without bankruptcy protection – to avoid mediation and other steps which would otherwise be required under state law.) That 11th hour admission—an admission which appeared to indicate criminal misconduct, and clearly triggered a need to consult with constituents, ended up forcing a delay in the city’s decisions with regard to the declaration of fiscal emergency and a resolution formally directing staff to file for Chapter 9 municipal bankruptcy—an admission and action coming in the wake of the City Attorney’s warning that 13 of 16 years of budget documents were falsified—falsifications which officials believed was related to the borrowing from restricted funds – funds specifically legally restricted only for certain purposes – in order to meet payroll and other expenses during months when cash was short. Such undercover borrowings were then repaid as the revenues flowed in later in the year. The city finance skullduggery, combined with a failure to produce city audits for fiscal years 2012-13 or 2013-14, audits which are way overdue but expected, perhaps as early as October, understandably raised hackles—or, as Councilmember Henry Nickel put it, in opposing the rate increase: “If you have money meant for tires and spend it on something else, that’s malfeasance…Until we have the audits in place, you do not have my support. We need to make sure we don’t re-enact sins of the past.” Unsurprisingly, with Councilmembers increasingly focused on next month’s election, supporters of the rate increase accused opponents of demagoguery, or, as Councilmember James Mulvihill, one of the two current Councilmembers on the ballot in November, put it: “Watch out for the politician that wants to manipulate your emotion and not solve the problem you’ll have, anyway,” said. Fellow Councilmember Nickel, the only other incumbent on November’s ballot, opposed the request.

Water and sewer issues—as we have observed in the nation’s two largest municipal bankruptcies—Detroit and Jefferson County—are critical pieces of the puzzle—or, in this instance, as former San Bernardino Councilmember Susan Longville warned prior to the vote: “You have an infrastructure nightmare waiting to happen,” albeit she said, any increase should come after a presentation that more effectively demonstrated the need for an increase.

Mixing Governance & Business. Serving as a municipal elected leader is a thankless task and never-ending challenge. It is a grave responsibility. The scrutiny of television and other media can only increase that pressure—especially if your city or county is confronting a crisis. That is a time when total focus would seem to be a prerequisite. Nonetheless, even as a citizen committee explained its recommended changes Monday to San Bernardino’s city charter during a City Council meeting, Councilman Benito Barrios was elsewhere: he was on the dais, but also on Facebook: he was trying to sell his friend’s gun—an effort which, unsurprisingly, within an hour, meant his efforts screenshots were being tweeted and shared in Facebook groups across the city—or as one constituent put it: “I guess his ward isn’t as important as that firearm and said friend.” While questions arose with regard to the legality of the gun sale (unclear), perhaps the more stressing issue related to focus—or, as the Councilmember stated: “This was during the presentations being given. So it took me 30, 40 seconds in between presentations…The perception is very bad for the people, and I’m aware of that. It’ll probably never happen again.” The occurrence, as former San Bernardino County Supervisor, and San Bernardino Councilmember Neil Derry told the San Bernardino Sun is about “multitasking: Intelligent people do it all the time. It’s a requirement for Marines.”

Rising Tide? Michigan Gov. Rick Snyder this week unveiled a new program, Rising Tide, intended to offer state-based mentoring for local officials of 10 struggling municipalities. The pilot, which the state calls Rising Tide, proposes no fiscal assistance; rather, it is designed so that Michigan economic development officials will work with 10 towns to help local leaders understand and create fiscal and economic development tools and strategies to attract and create new jobs—or, as Gov. Snyder stated: “We can collaborate with communities to help develop the tools to advance a strong economic vision and create new career opportunities for residents…This program will help economically challenged communities be better positioned for redevelopment opportunities.” The Governor announced the new initiative at a visit to River Rouge, a fiscally challenged Detroit suburb of less than 3,000 families—where the median age in the 2000 census was 33 years—and where, according to the most recent Census data, the median income for a household in the city was $29,214, and the median income for a family was $33,875. About 19.1% of families and 22.0% of the population were below the federal poverty level, including 30.6% of those under age 18 and 10.5% of those age 65 or over. The program will be led by the Michigan Department of Talent and Economic Development. State officials will offer mentoring help to local officials in struggling communities, and also outline common economic development tools to create jobs. The Governor’s office selected the municipalities based on unemployment rates, poverty levels and labor participation rate.

The Hard Road Down. In the wake of rating agency Moody’s downgrade of Ferguson, Missouri’s general obligation bonds or debt seven notches to Ba1—a steep drop which Moody’s attributed to not only Ferguson’s deteriorating fiscal situation, but also to apprehensions over the small municipality’s pending lawsuits and oncoming consent decree—a consent decree which will be based upon the federal investigation of police tactics and the city’s municipal budget reliance on traffic court fines—the municipality reacted with its own fire, moodily accusing Moody’s of being unwilling to give it more time to provide information that would offer a fuller picture. When a municipality is confronted by serious fiscal stress, a downgrading renders its ability to borrow both more difficult—and more expensive: precisely the opposite of what might be seen as a prerequisite for meaningful opportunity to recover. Moody’s, in its downgrading, however, noting that Ferguson’s fiscal reserves are shrinking—wrote that the municipality could be insolvent as early as 2017, citing city documents, noting, ergo, that its downgrade reflected “severe and rapid deterioration of the city’s financial position, possible depletion of fund balances in the near term, and limited options for restoring fiscal stability.” Missouri law provides that any municipality or subdivision may file for chapter 9 municipal bankruptcy (six cities have so filed—as well as one school district and one special district). Moody’s wrote. In its response, the small city—already besieged by extraordinary challenges—noted that in the midst of all the urgent demands, it had been unable to meet the severe timeline mandate imposed by Moody’s in which to respond with all the information requested, noting: “As a result, the city believes that Moody’s report is incomplete and fails to provide true transparency associated with Ferguson’s finances.” The municipality further noted it is still in the process of tabulating FY2015 revenues and preparing plans to address revenues and expenses—even as it confronts staffing constraints due to ongoing negotiations with federal Justice Department officials. Nevertheless, Moody’s downgrade will have adverse consequences: the downgrade will affect Ferguson’s $6.7 million of outstanding GO bonds, $8.4 million of certificates of participation from a 2013 issue, and $1.5 million of 2012 certificates.

No Consideration of Bankruptcy. The seeming outcome of a hearing convened by U.S. Senate Finance Committee Chairman Orrin Hatch (R-Utah) and Senate Finance Committee Chairman Charles Grassley (R-Iowa) yesterday is that the Senate is unwilling to even consider legislation to permit the U.S. territory to be eligible for chapter 9 municipal bankruptcy. Even while expressing disinterest, they claimed they want more information on Puerto’s Rico’s increasingly severe fiscal crisis—and that of its municipalities—and how to fix them. Instead, Chairman Grassley, whose committee has no jurisdiction over municipal bankruptcy legislation, offered that Congress should consider amending the Jones Act to exempt Puerto Rico from its onerous provisions which have the effect of imposing a tax on the costs of shipping goods from Puerto Rico to the U.S.—a federal law which has discriminated against Puerto Rico’s competiveness in the Caribbean, harming its economy. The Chairman also suggested Congress could reconsider the application of the minimum wage—which is currently 77% of the Puerto Rican median income compared to 28% on the mainland. Finally, mayhap thinking of the important value provided by the creation of financial control boards for both New York City and Washington, D.C., Chairman Grassley told the witnesses that a federal financial control board could be a good alternative. For his part, Chairman Hatch, whose Judiciary Committee has jurisdiction over federal bankruptcy laws, including chapter 9, seemed to defer to perspective of Douglas Holtz-Eakin, president of the American Action Forum, and the former Director of the Congressional Budget Office. Mr. Holtz-Eakin testified: “The primary focus (with regard to Puerto Rico) should be on policies that restore economic growth,” telling the committee that enacting legislation to offer Puerto Rico access to Chapter 9 bankruptcy (he did not address enacting such legislation so that—as under current federal law—Puerto Rico could authorize its municipalities access to municipal bankruptcy). But he also testified that the Puerto Rican government needs to provide Congress with better financial documents, noting that the commonwealth’s lack of “high quality” documents is “one of the very troubling aspects of this situation:” “debt sustainability analysis” needs to be done for Puerto Rico. Thus, he opined, that to authorize Puerto Rico access to municipal bankruptcy could do more harm than good, because, he testified, it would lead to one-sided “haircuts” on the residents who currently own about 30% of Puerto Rico’s municipal bonds; he added, however, that giving the U.S. territory access to municipal bankruptcy protection be warranted “somewhere down the road,” but not now. For his part, Ranking Member Sen. Chuck Schumer (D-N.Y.) advised that he intends to urge that Chairman Grassley hold hearings on the municipal bankruptcy bill which would alter Puerto Rico’s status. In their testimony, Resident Commissioner Pedro Pierluisi (D-P.R.) and Government Development Bank of Puerto Rico president Melba Acosta each told the two committees Puerto Rico needs access to municipal bankruptcy protection to put a halt on the increasingly rapid depletion of revenues—so that the leaders have more time to negotiate on its debts—a chapter 9 filing, once accepted by a U.S. bankruptcy court, immediately freezes obligations to debtors, and initiates a process overseen by a federal bankruptcy court to work out a plan of debt adjustment with all its creditors—even as it guarantees there is no interruption of the provision of essential public services. The pair warned that, absent such protection, projections point to Puerto Rico running out of money near the end of the year, and adding: “The unavailability of any feasible legislative option to adjust debts has created an overall environment of uncertainty that makes it more difficult to address Puerto Rico’s fiscal challenges and further threatens Puerto Rico’s economic future.”

Ensuring a Sustainable & Safe Municipal Future

July 9, 2015

The Road Back from Municipal Bankruptcy. Jefferson County Commission President Jimmie Stephens notes that the County’s return to fiscal sustainability in the wake of its successful exit from municipal bankruptcy—the largest in U.S. history at the time, has improved enough for the county to reenter the municipal market: “This Commission is dedicated and determined to follow the judge’s order and to follow the bankruptcy plan…There are still plenty of challenges, but we’re working together and that gives us opportunities for success…We’re doing our due diligence and making sure that we don’t revisit some of the mistakes of the past.” Jefferson County’s assessed property values have increased, sales and use tax collections are up, and Jefferson County is now prepping to host the World Games athletic competition in 2021. The county’s budget has remained structurally balanced, but, unsurprisingly, the recovery has been insufficient to provide for less anticipated needs: there have been insufficient revenues to resume some services, such as to complete the County’s road-paving program.

Commission President Stephens also reports rejuvenated relationships with the Alabama legislature, noting: “We went to the Legislature with a genuine set of needs, not wants…In order to do our job and be effective in our job, we needed additional revenue to reinvest in the future of Jefferson County.” The presentation included the detailed steps the County has taken as part of its implementation of its approved plan of debt adjustment by U.S. Bankruptcy Judge Thomas Bennett—albeit that plan has been under challenge before the 11th U.S. Circuit Court of Appeals for nearly two years: a key issue before the federal court is whether a lower-court appeal of Jefferson County’s plan of debt adjustment by a group of county sewer system ratepayers is moot, with Jefferson County’s attorneys arguing that the appeal is not viable, because the court-approved bankruptcy exit plan was largely implemented following the sale of $1.8 billion in 40-year sewer refunding warrants in December 2013—warrants which allowed the county to write down $1.4 billion in related sewer debt in an intricate transaction that cannot be unwound, according to the county’s attorneys. Notwithstanding, the federal judge presiding over the ratepayers’ appeal has ruled that the county’s plan of debt adjustment is not moot, because some key components are questionable, including a provision which requires the federal bankruptcy court to ensure that county officials adopt sewer rates sufficient to pay debt service on the refunding warrants—a key provision to the county’s ability to successfully issue a refunding two years ago. Jefferson County attorneys have urged that it is critical for the appellate court to resolve the mootness issue for investors and the stability of any municipality relying on exit financing to emerge from bankruptcy.

Is Puerto Rico Being Held Up? The U.S. House Judiciary Committee appears unwilling to provide Puerto Rico with access to the U.S. bankruptcy courts to offer the U.S. territory a time out to ensure the continuity of essential public services and to reorganize its debts under the oversight of a federal court. Chairman Bob Goodlatte (R-Va.) yesterday said: “Today, we met with our Republican colleagues on the Judiciary Committee to discuss the issues facing Puerto Rico…While no consensus was reached, a general concern was expressed that to provide Puerto Rico’s municipalities access to chapter 9 of the Bankruptcy Code would not, by itself, solve Puerto Rico’s difficulties, which are associated with underlying, structural economic problems.” That is, to offer protection to ensure the health and safety of U.S. citizens in the island’s 78 municipalities would, apparently, be an insufficient motive to act. The refusal to take any action as Congress nears its next five week recess—the very time period when Puerto Rico could default—could increase the import of the efforts by Sens. Chuck Schumer (D-N.Y.) and Richard Blumenthal ( D-Conn.), who indicate they intend to propose companion legislation to the now spurned H.R. 870 in the Senate. The House refusal to act comes as a number of Presidential candidates, including former Florida Governor Jeb Bush, former U.S. Senator and Secretary of State Hillary Clinton, and Sen. Bernie Sanders (I-Vt.) have also called for Congressional action on the issue.

Steep, Treacherous Fiscal Road Ahead. Just two years ago, we wrote: “Baltimore reached a peak population of 949,708 in 1960 and 30% of Maryland’s population resided in the city at that time. By 2010, the population had dropped to 620,961 and the city’s share of the state’s population fell to 11%. Like many Eastern and Midwestern cities, a significant portion of this loss in population is attributable to the decline of its industrial base and suburbanization. Baltimore lost 110,000 jobs between 1990 and 2010—about 24% of all jobs. Seventy percent of these jobs lost were in manufacturing and related industries. There are approximately 16,000 vacant and abandoned properties in the city—one blighted property for every 40 residents. Median household income is 44% lower than that of the state and crime is 86% higher. Through all of this change, Baltimore still retains its position as the only large city in Maryland and serves as its principal urban hub. Unlike other cities in this report, Baltimore has not been in a fiscal emergency and has a relatively healthy balance sheet.” Indeed, the Maryland legislature has explicitly rejected granting the option of municipal bankruptcy for its cities and counties.

But in the wake of the death of Freddie Gray last April, the fiscal and human challenges confronting the city are almost beyond our imagination. Yesterday, Mayor Stephanie Rawlings-Blake fired the city’s Police Commissioner, stating: “[A]s we have seen in recent weeks, too many continue to die on our streets, including three just last night and one lost earlier today.” As of yesterday, police report a 48 percent increase in homicides over last year–with May’s 42 the most in a month in a quarter century. Non-fatal shootings are 86 percent higher than last year–yet, even with the exceptional increase in shootings, the number of arrests is half of last year’s. In the wake of injuries to as many as 160 police officers during the rioting in Baltimore–even as uncertainty has increased with regard to what actions police officers can take when being assaulted–there appears to be greater and greater reluctance on the part of the rank and file to be entrapped between the Scylla and Charybdis of being injured or being charged with a crime for being too aggressive in enforcement.

According to the city’s police department, gunmen killed three people and wounded one yesterday near the University of Maryland, Baltimore—shootings in a municipality that has witnessed a record upsurge in homicides since April: shootings here which can hardly augur well for the University. While police stated the shootings were not related to the university, the Baltimore Sun reported that shots had been fired into a vehicle traveling on the same block five days ago. Police also report that looting of pharmacies during the unrest and a subsequent drug turf war have been behind a surge in killings in May—a month in which the city experienced 43 homicides, the highest number since 1972, but dropped the total to 42 when one killing was reclassified as justified. A police spokeswoman yesterday put the May homicide number at 41, the highest monthly tally since August 1990, without explaining the new total.

Baltimore reached a peak population of 949,708 in 1960—a time when 30% of Maryland’s population resided in the city; by last year, that number had dropped to 620,000–and the city’s share of the state’s population fell to 11%. Like many Eastern and Midwestern cities, a significant portion of this loss in population was attributable to the decline of its industrial base and suburbanization: Baltimore lost 110,000 jobs between 1990 and 2010—about 24% of all jobs: seventy percent of these jobs lost were in manufacturing and related industries. There were approximately 16,000 vacant and abandoned properties in the city in 2010—one blighted property for every 40 residents. Median household income was 44% lower than that of the state, and crime was 86% higher. This year, the city’s homicide rate—prior to last night’s shootings, had reached 155 homicides—or nearly 50 percent higher than at this point last year. The exceptional challenge—not just for the Mayor and Council, but also for Gov. Larry Hogan and the Maryland legislature is how to try to staunch the mayhem and its exceptional erosion of the city’s future fiscal stability.

Democracy & The Challenges It can Create to Municipal Bankruptcy Recovery & Sustainability

Democracy & Its Challenges to Recovery. Because of the unique governance and federalism involved with municipal bankruptcy, where a city or county may only file for federal protection—and then only if it complies with the laws and procedures dictated by the state enabling act, each city or county’s situation can be unique. In addition, of course, the role a state plays may also be a significant, contributing factor—so that, for instance, in Rhode Island and Michigan, local elected officials were preempted from any role; rather state-appointed emergency managers exercised the equivalent of dictatorial powers, but, in each state, the state itself evolved into roles of significantly contributing to resolution and eventual approval of the respective municipalities’ plans of debt adjustment by the federal courts. In stark contrast, in Alabama and California, there are no such provisions: in effect the municipalities (Jefferson County in Alabama; Vallejo, Stockton, San Bernardino, etc.) were or are left on their own to put together plans of debt adjustment. Indeed, if anything, as U.S. Bankruptcy Judge Thomas Bennett wrote in the case of Jefferson County with regard to its—at the time—largest municipal bankruptcy in the nation’s history: “The state of Alabama and its legislators are a significant, precipitating cause. Both before and after filing for its chapter 9 case, the county’s revenue-seeking activities with Alabama have been to no avail.” Thus, with a federally imposed May 30th deadline to put together its plan of debt adjustment for the U.S. Bankruptcy court, San Bernardino’s elected officials are working harder and harder through the democratic (small d) process to try through public hearings and legislating to put together a long-term strategic plan that would, in turn, create the foundation for the city’s plan of adjustment and the foundation for its fiscal and economic future. In effect, its elected leaders are seeking to put together a strategic plan which will articulate, via input from the community and guidance from leaders in the community, just where should the city be heading…and, in effect, laying the foundation for the city’s proposed Plan of Adjustment: the financial plan to set the City on course to realize those plans. So there are politics, art, and fiscal science or alchemy to determine—in a democratic process—how to return to solvency, reduce the factors that contributed to the insolvency, and agree upon a fiscal blueprint for a sustainable future. Absolutely unlike Detroit, that means the city’s leaders must figure out how to, in effect, construct a political or social infrastructure, or community involvement and leadership, so that the community itself takes ownership in this precipitous road ahead. Judge Bennett told me that one of his greatest concerns in the Jefferson County case was the absence of the county’s taxpayers from a key role in helping the county put together its exit plan—but of course, compared to Central Falls and Detroit, where taxpayers were totally excluded, Jefferson County and the California municipalities demonstrate the dual, challenging road of elected officials. Thus, in San Bernardino, the strategic plan will articulate, via input from the community and guidance from leaders in the community, just where the City should be heading. The city’s plan of adjustment will provide the financial plan to set the city on course to realize those plans. The goal is to, through this messy process of democracy, put together a process and plan about being service solvent again―in San Bernardino’s case, a plan modeled on similar strategic planning efforts by the county and San Bernardino City Unified School District, so that it will heavily borrow from the school district’s contacts and resources and require extensive meeting with the public. Or, as City Attorney Gary Saenz puts it: “We’re going to require a significant amount of engagement from all stakeholders — residents; businesses; important institutions, for example the school district…We’ve been under a gag order for much of this case… but we want to involve many more people now.” To date, work on the bankruptcy exit plan or plan of adjustment, which will expand on a usual municipal budget, detailing how the city’s creditors will be treated and include a 20-year forecast for the city — has been done behind closed doors—especially because of the pre-exiting gag order which expired at the end of last month and prohibited much of the information related to that plan from even being disclosed to City Council members. Now, with all seven council members privy to the information, Mayor Carey Davis has made clear the time for public involvement is coming: “We can’t have the strategic plan and the Plan of Adjustment pulling in two different directions,” noting that if the community wants the city’s focus to be on increasing education or reducing crime, the city’s plan of adjustment will need to fund those areas appropriately. According to San Bernardino’s timeline, a draft of the plan of adjustment will first be presented to the City Council — in closed session — in April, with the first public hearing in May. In the nonce, work will continue in parallel on the strategic plan, which is intended to be a longer-term plan of how the city should progress beyond bankruptcy and to be updated regularly. Mayor Davis reports his goal is to have four stakeholder meetings open to the public, followed by a “state of the city” in late February or early March.

San Bernardino’s Plan of Debt Adjustment Schedule
January, February
• Brief mediation judge
• Assess city organization
• Benchmark against other similar cities
• Develop staff recommendations for Recovery Plan
• Refine cost of Recovery Plan
• Develop components of Plan of Adjustment
• Check in with City Council collectively and individually
• Begin community engagement and strategic planning process
• Mediation and negotiation with creditors
March
• Finalize strategic planning/community engagement and integrate with preliminary Plan of Adjustment
• Mediation and negotiation with creditors
April
• Presentation of draft Plan of Adjustment to City Council in closed session
• Refinement of Plan of Adjustment
• Mediation and negotiation with creditors
• Ongoing public communication regarding Plan of Adjustment process
May
• Hold a public hearing on Plan of Adjustment and adopt it
• Submit the Plan of Adjustment to bankruptcy court
Source: City of San Bernardino

More Sticker Shock in the Motor City. Lazard, the global financial advisor representing city retirees during Detroit’s municipal bankruptcy, defended its fees yesterday, claiming it ate a $6 million bonus that had been promised if the city successfully exited bankruptcy court. The firm’s filing detailed the reduction the firm accepted during closed-door negotiations in the wake of Mayor Mike Duggan’s frustration about the threat that high fees could derail Detroit’s plan of debt adjustment—and waylay the city’s fiscal future sustainability. The action came with yesterday’s deadline for the vast array of the Motor City’s bankruptcy lawyers and consultants to justify the approximately $170 million in fees they have charged the city’s taxpayers—and for the ever patient U.S. Bankruptcy Judge Steven Rhodes to determine whether such charges are, in fact, reasonable. In a remarkable irony, Lazard was represented publicly by Ron Bloom, the former Obama administration auto czar. In its filing, Lazard claimed it accepted a 37 percent pay cut, which reduced its fees to $5.56 million, down from $8.44 million—under its contract with the city, Detroit was bound to pay the firm $175,000 a month plus a $6 million “success fee” payable if Detroit successfully exited bankruptcy court. The Segal Group Inc., a human resources and benefits consulting firm, also submitted a filing yesterday to defend its fees for its actuarial services to both the retiree committee and city. The firm advised the federal court that, when asked to cut its fees, it met in mediation with the city and “quickly agreed to a reduction of $99,000,” adding: “We believe that our billed amounts, coupled with the agreed-upon reduction of $99,000, were appropriate professional fees for sophisticated, high-level work that contributed significantly to the Retiree Committee’s acceptance of the Plan of Adjustment and to the successful resolution of the bankruptcy in a timeframe much shorter than initially anticipated.” The retiree committee retained Segal in September 2013 to provide consulting: Segal was initially responsible for providing financial analysis of the proposed changes to the pension and retiree health care benefits and to educate the committee on the impacts, but, as the bankruptcy progressed, the firm’s attorney yesterday told Judge Rhodes: “Our role was significantly expanded to include advising the city and serving as the pension expert at trial…We gave the Detroit bankruptcy engagement the highest priority, forfeiting other client opportunities.” In addition, Segal claimed that prior to agreeing to cuts in mediation, it had already provided a “substantial discount” in its fee structure, noting in its filing concessions of 14 percent in its overall bill of $3.9 million, not including the $99,000 reduction. Detroit’s legal and accounting tab came to some $170.2 million before a state reimbursement of $5.29 million: among the heaviest costs: the city’s lead law firm, Jones Day, at $57.9 million; investment banking firm Miller Buckfire, $22.82 million; restructuring firm Ernst & Young, $20.22 million; and operational restructuring firm Conway MacKenzie, $17.28 million. Dentons US LLP, a law firm that represented the official committee of city retirees, received $15.41 million. The city’s two pension funds paid attorneys at Clark Hill $6.25 million and financial advisers at Greenhill & Co. $5.71 million. The filing shows bankruptcy mediators were paid $980,000, although none of the money went to federal judges who served on the mediation team. Most of the money went to mediator Eugene Driker’s law firm.

The Unique Federalism of Municipal Bankruptcy

eBlog

December 17, 2014
Visit the project blog: The Municipal Sustainability Project

Federalism Writ Large

As we observe the interplay of the three different levels of government in addressing municipal bankruptcies across the nation, one of the most striking issues is the extraordinary disparity in state roles and the unforeseen, but extraordinary role of the federal judiciary branch. While the federal municipal bankruptcy law, chapter 9, bars a municipality from eligibility to file for federal protection absent state authorization; the state—if it so authorizes—then can also define how it wishes to play (or not to play). Thus, in the wake of Central Falls, Rhode Island’s bankruptcy filing, the state not only appointed a former Rhode Island Supreme Court Judge, Robert Flanders, to serve as the city’s receiver, but undertook significant state actions to provide intervention and assistance in an effort to help other severely distressed municipalities from having to enter into bankruptcy. Central Falls had served as a wake-up call. In contrast, in the case of Jefferson County, U.S. Bankruptcy Judge Thomas Bennett wrote: “All those who attribute Jefferson County’s bankruptcy case…and plight only to the conduct and actions by the county are ill informed…The State of Alabama and its legislature are a significant, precipitating cause…” In the case of Detroit, the deft (and astute) intervention by U.S. Chief Judge Gerald Rosen appeared to play a unique role in facilitating a significant state role, as Michigan Governor Rick Snyder and bipartisan leaders of the Michigan legislature converted Judge Rosen’s hastily scribbled diagram into what become the so-called “Grand Bargain”—a development that seemed to be the key to the Motor City’s successful exit from bankruptcy. But in California, as in Alabama, the state not only appears to have contributed to some of the severe fiscal stress that precipitated the string of municipal bankruptcies, but also has been virtually irrelevant to any and all efforts to municipal bankruptcy recovery. Rather, it is the federal judiciary—especially in its intermediary role—that seems to be contributing to defining a new, constructive role.

A Friendly Federal Hand. With the judicious assistance of court-appointed mediator, U.S. Judge Gregg Zive of the Federal Bankruptcy Court in Reno, Nevada; San Bernardino finally has what City Attorney Gary Saenz describes as a “work plan” to prepare its plan of adjustment to address not only the city’s 200 creditors, but also to put together its plan of debt adjustment so that San Bernardino could exit bankruptcy and create a path to a sustainable future. Not only that, but the plan has been reviewed by the entire City Council — not just the small team that previously was allowed to know details of the confidential mediation where much of the city’s bankruptcy plan has been ironed out. Mr. Saenz noted: “That [gag]order (by Judge Zive) has now been revised so that Council will now be part of those negotiations and will significantly become a part of bankruptcy team discussions…However, as mediation with creditors continues, your council representatives will be subject to the confidentiality order and will not be at liberty to discuss particulars.” Mr. Saenz said the council will now meet regularly with the bankruptcy team, whereas, previously, the majority of the council was not permitted to be involved in these critical discussions about whether and how to shape the city’s plans to exit municipal bankruptcy and create the architecture for a sustainable future—or, as Councilmember Henry Nickel noted yesterday: “You’re making decisions with very, very incomplete information…That, I think, really inhibits the ability to make fully considered decisions.” Interestingly, Judge Zive’s gag order encompassed not just San Bernardino elected officials, but also U.S. Bankruptcy Judge Meredith Jury. Mr. Saenz yesterday said the City Council met Monday with Management Partners, the consulting company San Bernardino hired last November and which played a key role in helping former Stockton City Manager Bob Deis and the city’s elected officials to put together Stockton’s plan of adjustment—providing the key for the city to successfully exit municipal bankruptcy last month. Thus, Mr. Saenz told the Council: “They now stand united in their pledge and commitment to support the city manager and his team to ensure the work plan is fully executed…We are at this time confidently poised to develop and present a comprehensive recovery plan that will take us through and out of bankruptcy.” Mr. Saenz added: “As we proceed through development of our recovery plan of adjustment, the public will be provided more and more information regarding its particulars, so that, ultimately, all stakeholders, citizens, business community and even creditors will commit to and support the plan.”

Michigan Takes on Urban Blight. Michigan Governor Rick Snyder yesterday announced the state is splitting $75 million in federal funding between 12 cities, including nearly $50 million for Detroit, in its latest effort to take on blight: “This is another important step in Michigan’s comeback, which has become a national example for what can be accomplished when federal, state and city partners work together with a shared vision to solve a problem…As a result of this collaboration, these cities will be better places to live, work, play and invest.” The effort is being funded under the U.S. Department of Treasury’s Hardest Hit Fund program. Last October, the U.S. Treasury approved Michigan State Housing Development Authority’s reallocation of $75 million to its blight elimination program: the $75 million is part of nearly $500 million Michigan was allocated in 2010 through a federal program to help homeowners hit hard by the national housing crisis, with the state creating an evaluation system which includes residential housing vacancies and requiring each applicant municipality to submit blight plans, estimate project costs, and provide a timeline for the work. U.S. Treasury Deputy Secretary Sarah Bloom Raskin noted: “This partnership demonstrates a commitment to revitalizing our cities and to addressing the damaging effects caused by vacant and blighted properties…Removing blighted properties is an important step in stabilizing neighborhoods, and we look forward to continuing our efforts to assist hardest hit communities around the nation.” In its application, the Motor City successfully applied for $50 million of the current $75 million allotment to provide for 3,100 demolitions, or significantly less than 10% of its more than 40,000 vacant structures. (The feds have already has awarded Detroit’s Land Bank $52 million to tear down at least 3,300 of them. Another $420 million — saved by the city as part of its federally approved plan of debt adjustment — also will be used to raze vacant houses and clear lots. The city’s land bank is averaging about 200 demolitions a week. The included communities are: Detroit, $50 million ($47.4 million in second-round funding combined with $2.6 million in reserves from the first round); Lansing, $6 million; Jackson, $5.5 million; Highland Park, $5 million; Inkster, $2.25 million; Ecorse, $2.19 million; Muskegon Heights, $1.8 million; River Rouge, $1.3 million; Port Huron, $1 million; Hamtramck (a municipality wholly within the boundaries of Detroit), $952,000; Ironwood, $675,000; and Adrian, $375,000. According to officials, each blight partner must spend 25 percent of all funds in the first six months, 70 percent of funds within 12 months, and 100 percent within 18 months. U.S. Treasury requirements state any remaining funds as of New Year’s Eve, 2017, must be returned to their office.