Balancing a Municipality’s Past Versus Its Future

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eBlog, 4/21/16

In this morning’s eBlog, we continue to follow Atlantic City’s blues—and the racing deadline the city faces in the midst of uneven state leadership—but remarkable state power and authority over the city—all without, however, any obligation to provide fiscal assistance. We continue to follow the unprecedented leadership efforts of House Speaker Paul Ryan and House Natural Resources Committee Chair Rob Bishop in their efforts to coordinate with U.S. Treasury officials to address the nearing insolvency in Puerto Rico—mayhap with insolvency looming at the same time as in Puerto Rico. We look back at the test of time since former President Reagan signed the 1988 municipal bankruptcy amendments into law: how has it worked? How has it balanced municipal public pension obligations versus a municipality’s bondholder obligations—and with what potential consequences for a city’s future? As we head down this morning to the Southern Municipal Conference in Norfolk, this seems like a lot to ponder upon.

Atlantic City Blues. New Jersey’s key state legislative leaders met privately yesterday to discuss their competing options for helping Atlantic City avoid insolvency and municipal bankruptcy, but were unable to reach any agreement: the city is beset by the closure of four casinos in recent years; it has about a $100 million budget deficit; and it is more than $550 million in debt. The closure of the casinos and drop in the assessed values of the remaining properties have combined to reduce the city’s property tax base by more than 50 percent in the past five years—forcing it under State supervision pursuant to the Local Government Supervision Act. However, notwithstanding State supervision and imposition of Emergency Manager Kevin Lavin, Atlantic City currently faces a revenue shortfall that could render the municipality insolvent in the near future. Added to the governance challenge, according to an analysis last week by the state’s Office of Legislative Services, there is no New Jersey statute which obligates the State to financially assist Atlantic City in case of an imminent default on its municipal debts—an opinion confirmed by the fact that the State is not listed on the bond covenants as a guarantor; rather the state law pledges the taxing authority of the municipality alone to “pay the interest on bonds issued.” The opinion notes, however, that under the state law: “Once a municipality is under State supervision, the Local Finance Board may impose certain restrictions on the city, including limitation on debt and limitations on expenditures.” The epistle adds that the state has “broad authority to order the city to liquidate or refinance its current debts, and, if the city does not comply with those orders, the Local Finance Board may perform those actions itself or through its agents.” Finally, the letter notes that while the state statute directs the state to “extend all possible consultation and assistance to municipalities,” the state is “not aware of any interpretation of that statute that requires the assistance to be in the nature of state aid or the assumption of the city’s debts.” The letter confirms that not only does the state regard itself under no obligation to help, but that any such help is unlikely.

Similarly, in the wake yesterday of an hour-long discussion between New Jersey Assembly Speaker Vincent Prieto and Senate President Stephen Sweeney, the two reported no progress had been made and stressed that there is now increasing apprehension the city is headed toward insolvency, with President Sweeney noting: “I think we’re going to face bankruptcy…I’m very concerned what’s going to happen to other communities because of this.” It appears the Speaker recognizes the potential for contagion: Atlantic City defaults on its debt or filing for chapter 9 municipal bankruptcy could trigger downgrades to the credit ratings of other municipalities across New Jersey.

For its part, in the wake of Tuesday’s rejection by a New Jersey Superior Court judge of a state request to freeze Atlantic City’s spending until the city makes all the payments it owes to its school district over the next three months, the city turned the tables by filing a counter lawsuit demanding the state pay the city with $33.5 million in aid — funds which local leaders say they were promised, but which Gov. Chris Christie vetoed in January. In addition, the city is requesting the court to designate a special master to be appointed to oversee the state monitor the Christie administration placed in city hall six years ago to oversee the city’s finances—or, as Atlantic City Council President described it: “We have to fight back…We believe to balance this thing out, we have to go in front of a judge. The facts will play themselves out in our favor.” In addition, the suit calls for the state to hand over key documents related to the quasi-state takeover, including the report filed by the Governor’s appointed emergency manager—and that the court bar the state from taking any “punitive, retributive, or adverse action against the city of Atlantic City.”

Meanwhile in Trenton, State Senate President Sweeney has been pushing a plan backed by the Governor which includes an aid package for the city and a bill that would allow a five-year takeover of many city functions—even as in the House, House Speaker Vincent Prieto has announced his own rescue bill—noting, with its introduction yesterday—“Atlantic City needs help…but they need to be treated fairly.” The action came as Sen. Sweeney said he had offered a second compromise in private yesterday, although a spokesperson for Speaker Prieto said no such offer was made. Gov. Christie added in what might herald the commencement of a “blame game” that Speaker Prieto “is going to be responsible for the bankruptcy of Atlantic City.” Sen. Sweeney noted that the Speaker “doesn’t feel Atlantic City can go bankrupt,” because he believes the state is required under law to step in. Senate President Sweeney, however, noted that “Nowhere does it say the state has to write a check,” a position seemingly supported by a different analysis from the state’s Office of Legislative Services—albeit that opinion does note that under New Jersey law, when a municipality defaults for more than 60 days on outstanding notes or bonds, the court “shall require the state to exercise its powers and duties to stave off bankruptcy.”

Maybe A Little Good Gnus. Meanwhile, Atlantic County Superior Court Judge Julio Mendez has ruled that Atlantic City is in compliance with payments owed to its school district, a judge has ruled, denying the state’s request that Atlantic City be forced to freeze spending until outstanding property tax payments owed to its school district through June 30 are paid. The city made an $8.4 million payment to the public schools on Tuesday and needs to pay an additional $25 million over the next two months. In the wake of Judge Mendez’s ruling, Atlantic City announced a counterclaim against New Jersey demanding it provide $33.5 million in aid that had been approved by a state monitor for the FY2015 budget—funds to be derived from a bill in the state legislature vetoed by Gov. Chris Christie that would have enabled the city’s eight casinos to make payments-in-lieu-of-taxes for 10 years—legislation the Governor has said he will not sign without an approval of legislation enabling a state takeover that would empower New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for up to five years.

Puerto Rico. Congress seems increasingly unlikely to take action to help Puerto Rico ahead of a May Day deadline for the Commonwealth to default on a nearly half-billion-dollar debt payment—a failure to act which could push Puerto Rico and its 3.5 million American citizens further into crisis, exacerbating not only a growing fiscal crisis, but also a potential humanitarian disaster—after House Natural Resource Committee Chairman Rob Bishop (R-Utah) was forced to abruptly cancel a vote on a Puerto Rico debt restructuring bill when it was short of votes last week. A revised version is not yet completed, although Chairman Bishop warned that: “I’m not sure that on May 2 Armageddon takes place, but clearly I think it will illustrate that there is a significant problem…There are still some people out there saying there’s not a problem…No, there is a problem, they will default on some portion.” The Chairman’s draft proposal would create a create a financial control board, not unlike comparable boards that were used to avert bankruptcies in New York City and Washington, D.C., to manage the U.S. territory. Now it appears committee action is unlikely before next week at earliest, risking chances of final passage through the House and the Senate before the end of next week.

Can Municipal Bankruptcy Work? Notwithstanding the naysayers on Capitol Hill, not to mention the deep apprehensions we had (and strong opposition from leaders in the National League of Cities) to the municipal bankruptcy amendments President Reagan signed into law in 1988, nor the significant string of municipal bankruptcies in Jefferson County, Central Falls, Stockton, San Bernardino, but, perhaps most of all, Detroit—where I met with Kevyn Orr, the state’s selected emergency manager, on the morning he filed for the historic city of soul to go into municipal bankruptcy—a city which had suffered not only criminal malfeasance from its own elected leaders, but also devastation by the Great Recession of its iconic auto industry—devastation of economic destruction and population loss so deep that it made one apprehensive that it could ever recover. Yet, today, in the wake of extraordinary leadership by a federal bankruptcy judge and his partner from a U.S. District court, and thanks in no small part to a $100 million pledge from JP Morgan Chase—a commitment that has leveraged, according to Mayor Mike Duggan, another $30 million, and dynamic leadership by the Mayor, the city is on the brink of a sparkling new bridge to Canada that could make Detroit a gateway over the years towards a recovery which only four years’ ago seemed almost unthinkable.

Future versus the Past? Notwithstanding phony claims by some Members of Congress that any form of municipal bankruptcy would amount to a federal bailout of Puerto Rico, municipal bankruptcy means on its face that there will be losers. Just think, Judge Steven Rhodes in Detroit had to opine over the city’s plan of debt adjustment with regard to how its assets would be divvied up between more than 100,000 creditors. His decision was further complicated by Michigan’s constitution, which protects contracts—contracts such as Detroit’s pension obligations. Unlike a non-municipal corporation, the importance of chapter 9 is to insure there is no disruption of essential municipal services; there are, however, exceptionally hard choices forced with regard to such cities’ municipal bondholders and retirees. The latter, after all, are taxpayers to the city—and steep cuts in pension obligations might make them wards of the city. In contrast, bondholders are spread all across the country: they are often neither constituents, nor voters. Yet, they are vital to any enduring fiscal and economic recovery. So, as Bloomberg this week wrote: [municipal] bondholders have reason to fear a fight in a federal bankruptcy court if an insolvent municipality or county files, because, as the piece noted: “recent cases show that when municipalities go broke, investors lose when pitted against municipal retirees,” adding, for instance, that San Bernardino’s proposed plan of debt adjustment pending before U.S. Bankruptcy Judge Meredith Jury provides for a 60 percent loss to the city’s municipal bondholders, but retains retirement benefits intact under the settlement which could pave the way for the terror-stricken municipality to exit nearly four years in municipal bankruptcy—the longest of any city in history. According to Black Rock Inc., the outcome in San Bernardino shows why municipal bondholders should be wary of distressed local governments which can petition to have debts reduced in federal bankruptcy courts, because, Peter Hayes, BlackRock’s head of municipal bonds, notes: “Pensions are faring far better than other creditors under Chapter 9…This reinforces the view that bondholders need to be extremely cautious dealing with distressed municipalities.”

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So It Turns Out Chapter 9 Municipal Bankruptcy Can Work!

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eBlog, 4/15/16

In this morning’s eBlog, we continue to follow the unprecedented leadership efforts of House Speaker Paul Ryan—working with U.S. Treasury officials to address the nearing insolvency in Puerto Rico—where the Speaker confronts misinformation and a heavy lobbying campaign to mislead and delay final consideration. The Speaker and Minority Leader Nancy Pelosi are meeting with their respective caucuses in hopes of moving the proposed legislation to the full House by next week. If anything, the leadership by bipartisan House leaders surely contrasts with New Jersey, where Atlantic City is on a timeline to insolvency not very different than Puerto Rico, but where little consensus appears with regard to the most effective resolution. Finally, we look back to where it all began—in a sense—Orange County—the first municipality in the nation to file for chapter 9 municipal bankruptcy after the adoption of the 1988 municipal bankruptcy law, P.L. 100-597. Orange County’s fiscal collapse, moreover, because the County—at the time—was managing a pooled fund for over 200 California municipal school districts, cities, and counties, provided the first test with regard to whether the new federal law would work—or fail. There is nothing like the test of time.

Governing Amid Bankruptcy Misconceptions. House Speaker Paul Ryan has scheduled a policy meeting this morning in an effort to overcome resistance to the bill authored by House Natural Resources Committee Chairman Rob Bishop (R-Utah) as he seeks to gain sufficient support to get the bill reported to the full House, with the Speaker warning the Chairman “did not have votes on the other side of the aisle going into the markup.” Chairman Bishop and other sponsors of the bill will brief House Republicans this morning—emphasizing that—contrary to claims made by some Members and lobbyists for hedge funds—that the bill was specifically designed to prevent any federal bailout, with the Speaker adding that “the direction we’re headed with an oversight board” will help members appreciate and better understand the fiscal commitment. Part of the challenge is coming from Members such as Rep. Tom McClintock (R-Ca.), who warned his colleagues the bill was a bailout and warned it would lead other states to demand the same treatment—demonstrating both a lack of understanding of the outcome of the municipal bankruptcies in Orange County (please see below), Stockton, and San Bernardino in his home state—in no case has there been any bailout—and demonstrating an inability to understand the dual sovereignty of the U.S. Constitution. Indeed, Speaker Ryan has warned that absent swift action to address Puerto Rico’s looming insolvency, the federal government would be forced into a costly federal bailout, noting: “The need for Puerto Rico legislation is to bring order to chaos, and my number one priority as Speaker of the House with respect to this issue is to keep the American taxpayer away from this: there will be no taxpayer-funded bailout down the road.”

On the other side of the aisle, House Minority Leader Nancy Pelosi (D., Ca.) yesterday said Democrats have made “some substantial progress” working with Republicans and the Treasury Department to iron out her party’s remaining concerns with the bill, adding: “At the end of the day, any bill must have restructuring that works, an oversight board that is respectful of the people of Puerto Rico and does not undermine the restructuring part of the bill and does not contain extraneous provisions that harm working people.”

New Jersey & You. Atlantic City, facing insolvency—but less constructive state leadership—has made a $4.25 million payment to its school district in order to ensure its public schools remain open and the teachers paid. The payment came in the wake of a suit filed last week by the New Jersey Department of Education to force the fiscally beleaguered municipality to make all payments due the school district through July, some $34 million, or about $8.5 million per month. The school board did not support the lawsuit, noting that it had been working with the city to resolve their financial problems. A hearing on that suit is scheduled for Tuesday. The added costs and disruption from the state came as New Jersey Senate President Steve Sweeney (D-Gloucester) has proposed an alternative proposal aimed at saving Atlantic City from insolvency—one which proposes additional benchmarks for the city over and above what he had previously proposed. The revised compromise would allow Atlantic City:
• 130 days to address its $102 million deficit; and
• Mandate that the city, which is close to running out of cash flow, cut its current spending per capita from $6,700 to $3,500.

Failure to meet these conditions would trigger House action on the Senate-passed bill which would authorize New Jersey’s Local Finance Board to renegotiate outstanding debt and municipal contracts for as long as five years. In his statement, Senate President Sweeney noted: “This plan gives Atlantic City the opportunity to use all the tools at their disposal to finally reduce spending and reform government operations before the state asserts control over its municipal finances.” Unsurprisingly, Sen. Sweeney not only omitted mention the state role in naming an emergency manager for the city and that individual’s responsibility—nor what constructive suggestions he could contribute—even as the city has implemented a 28-day pay period suspension to allow time for May tax revenue to arrive to fund the next paychecks for city employees. The House Leader’s pressure adds to the increasing pressure from Gov. Chris Christie, who has warned he will not sign a companion bill that provides payments-in-lieu of tax (PILOT) funds from casinos absent this state takeover power.

In contrast, State Assembly Speaker Vincent Prieto (D-Secaucus) has, as we have noted, proposed Christie-opposed legislation which would create a quasi-financial control board, not dissimilar to that being proposed for Puerto Rico—and similar to ones utilized years ago in New York City and Washington, D.C.—under which a five-member committee would assume increased control if certain benchmarks were not met within a year. Speaker Prieto noted that Sen. Sweeney’s proposal was a “step toward compromise,” but still has collective bargaining concerns. For his part, the beleaguered Atlantic City Mayor Don Guardian responded that Speaker Prieto’s bill is “the most pragmatic” approach, adding: “We have enormous problems with legacy costs and debt service from previous tax appeals and other debts that must be addressed over the long-term…I am completely open to compromise and working together to find a solution, but it must be within a reasonable and practical framework.”

The End of the Beginning. With Orange County, Ca., on the verge of making its final payments based upon its plan of debt adjustment from its 1994 municipal bankruptcy—a municipal bankruptcy triggered by a devastating loss of nearly $1.64 billion on derivative investments—those payments will clear its slate and restore the county’s ability to devote its full budget to the county’s future—rather than the devastating financial investments it made more than two decades ago in derivatives that cost it in excess of $1.6 billion—and, because there were also pooled funds from other municipalities in southern California (The investment pool consisted of funds from the county as well as approximately 240 other local agencies, including school districts, cities, and special districts). The insolvency had risked much greater fiscal disasters. Orange County entered municipal bankruptcy after its investment pool reported the losses from highly leveraged positions that unraveled when interest rates rose. The county’s filing for chapter 9—the first filing in the wake of municipal bankruptcy amendments signed into law by former California Governor and U.S. President Ronald Reagan—was met at the time by consternation by the nation’s cities’ leaders. But the chapter 9 ensured there was no interruption of essential public services—and that a lesson was learned: Orange County Executive Frank Kim yesterday said the municipal bankruptcy experience “has made us more conservative in terms of being very careful to not issue debt where we don’t have to.” Orange County currently has plans to issue $68 million for a central utility upgrade at the end of May, according to Suzanne Luster, public finance director. The proceeds will be used to upgrade the heating and cooling infrastructure that supports the civic center campus, the Orange County Jail, and federal and state buildings. County supervisors will vote May 10 on that bond sale, which would be its first long-term debt issuance in 10 years.

Fundamental Federalism Challenges

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In this morning’s eBlog, we applaud what could be a signal breakthrough in San Bernardino that might pave the way towards the city’s exit from the longest municipal bankruptcy in U.S. history. The actions are something those at the Treasury and the U.S. House Committee on Natural Resources might be well advised to consider as they struggle to try and come up with a plan to prevent the rapidly onrushing insolvency in Puerto Rico. As much as the Committee, in its initial draft, has chosen to decry chapter 9 municipal bankruptcy, the process has, time and again, with great patience and an extraordinary federal role, proven prescient. We also try to get schooled on the possible municipal bankruptcy by the Chicago Public School system—something which would require state legislation, and something which would re-raise fundamental federalism challenges between state constitutions and federal law. Oh my.

A Significant Step by San Bernardino. The GE slogan made famous by former California Governor and later President Ronald Reagan in the 1950s was “progress is our most important product.” Yesterday, not so far from the former President’s old stomping ground, the City of San Bernardino, the city in municipal bankruptcy longer than any other in U.S. history, achieved its own significant progress when it reached agreement as part of its negotiation with creditors on a plan of debt adjustment to pay bond holders of its pension obligation bonds 40 percent of what they are owed, thereby achieving a reduction in the total payments to one of its largest creditors by about $45 million. While the deep discount is far short of the 1 percent the city had first proposed, whilst the bondholders sued in an effort to gain the entire amount the city agreed to for the California Public Employees’ Retirement System. In a written statement, City Attorney Gary Saenz noted: “The settlement will end the costly legal battles between the City and the settling creditors over confirmation of the City’s Chapter 9 Plan of Adjustment, as well as how much the creditors are to be paid.” Under the nine-page settlement agreement, those creditors — the Luxembourg-based bank EEPK, and Ambac Assurance Corporation — agreed to drop their litigation against San Bernardino and release the municipality from any future liability related to the pension obligation bonds. The two also agree to support the city’s disclosure statement — an amended version of which is due to U.S. Bankruptcy Judge Meredith Jury today. Under that agreement, San Bernardino agrees to pay its debt over a 30-year period beginning one year after Judge Jury approves its plan of debt adjustment and exit from chapter 9 municipal bankruptcy. The crucial step means the city funds will be freed up for additional investment in public safety of about $2 million per year, according to the city. As we experienced from the invaluable role of U.S. District Judge Gerald Rosen as an intermediary for now-retired U.S. Bankruptcy Judge Steven Rhodes in Detroit, in San Bernardino, U.S. Judge Gregg Zive—serving in a similar capacity—served as the key to the resolution—a resolution the San Bernardino City Council last week approved in closed session.

Getting Schooled on Municipal Bankruptcy. After receipt last month of a signed, sealed, and certified letter to the Chicago Public Schools (CPS) and the city’s board of education, Illinois’ State Board of Education last month commenced a formal investigation “of the financial integrity of Chicago Public Schools,” raising increasing apprehension the city’s massive public school system could become insolvent and bankrupt. Because Illinois does not currently authorize municipalities, including school systems, to file for chapter 9 municipal bankruptcy, the epistle raises the stakes in the Illinois legislature, where Illinois Governor Bruce Rauner has asked the legislature to authorize municipal bankruptcy. Should the state so act on an issue eerily comparable to Congress’s deliberations over the fast-approaching default in Puerto Rico, the impact on the nearly $6 billion in outstanding CPS debt would be at stake. CPS, in its most recent municipal bond sale, warned that one of its pledged repayment streams under the state’s alternate revenue bond structure would meet the bankruptcy code’s designation of “special revenues,” that is revenues that would be affected by a municipal bankruptcy. CPS currently has a failing fiscal grade with some $10 billion in unfunded pension obligations, a looming $1 billion deficit, and a rising annual teacher pension payment of about $700 million. With the issuance just last month of some $725 million in municipal debt—bonds which triggered an 8.5 percent tax-exempt rate in order to sell—and with an accompanying disclosure statement which incorporated language from a special opinion which provides the legal reasoning behind CPS’ position that the municipal bonds’ structure provides a security which preserves the statutory lien on pledged revenues and offers relief from the automatic stay provisions of chapter 9 municipal bankruptcy. The accompanying tax levy for debt service on the bonds is not subject to the property tax caps that non-home-rule units such as the school system operate under. Repayment would rely on a combination of pledged state aid, block grants, and tax-increment financing and personal property replacement tax revenues. Some credit rating agencies have assigned the new debt as junk because of CPS’ severely distressed overall credit profile. The uneasiness about the possibility of a municipal bankruptcy has triggered, unsurprisingly, questions with regard to the so-called “automatic stay” provisions arising from a chapter 9 filing: how would such a filing apply to the application of so-called “special revenues,” e.g. to the payment on the bonds secured by those special revenues? This is, at the moment, further roiled by the absence of any chapter 9 authority under Illinois law and further complicated by the exemption of CPS from some state oversight rules—where CPS is authorized to direct the county to deposit pledged property taxes with the bond trustee, albeit where said direction can may be revoked. All of this would, of course, be confounding to any math student in any Chicago public school, contributing even more to the cost to the system in higher interest rates.

All of this is contributing to the schooling of state legislators on the intricacies of chapter 9 municipal bankruptcy, state authorization of which the Governor had proposed as a key part of what he termed his “turnaround agenda” as a means to provide Illinois’ municipalities leverage in addressing pension negotiations, having, earlier this year, endorsed state legislation which would subject CPS to state statutes allowing for oversight and grading the way for municipal bankruptcy. Were the state legislature to agree, it would raise the kinds of federal-state legal confrontations raised in Detroit’s and Stockton’s chapter 9 municipal bankruptcies with irreconcilable issues because the respective pension programs, defined as contract, are protected by the respective state constitutions; however, those pensions, as reduced under Detroit’s federally approved plan of debt adjustment, reduced the city’s pension obligations—and the initial proposals to pursue appeals to the 6th and 9th U.S. Circuit Courts of Appeals never materialized. Thus, in the wake of the 2014 Illinois Supreme Court ruling two years ago that benefit cuts under Chicago’s 2014 pension reforms violated state law giving contractual status to membership in governmental pension funds, the same federal-state municipal bankruptcy challenge could well re-emerge. The scholarly professor of municipal bankruptcy, Jim Spiotto, yesterday noted to the Bond Buyer that only four school districts have filed for municipal bankruptcy in the last sixty years—in large part because most states hold oversight powers that can be critical to averting insolvency: he said that “Two of the four never got to a plan of adjustment. They realized once they got in there was a better way.” One, the San Jose Unified School District, filed for municipal bankruptcy in 1983 in the face of steep demands under a proposed salary increase plan; however, the parties reached an agreement on a new wage plan and the bankruptcy petition was dismissed. Subsequently, just up the highway, the Richmond Unified School District filed for municipal bankruptcy in 1991 due to fiscal and operational woes. In that instance, school parents sued the state—effectively scoring A’s when the state responded by loaning the district $29 million.

Municipal Governance in Bankruptcy

February 16, 2016. Share on Twitter

Governance in Bankruptcy. Ronald Reagan, the former President and Governor of California, in his pre-political days, for General Electric, used to say: “Progress is our most important product.” Now, it appears, there might be some real governance progress underway in San Bernardino—perhaps presaging changes that will be critical not only to its hopes from emerging from the longest municipal bankruptcy in U.S. history, but also for realizing a sustainable fiscal future. Yesterday, a municipal committee tasked with reforming the city’s charter, made up of members whom the City Council and Mayor had appointed, provided an update on its progress toward a new charter—a key step as they are aiming at presenting final recommendations by April in order to ensure they may be put before the city’s voters in November.

In our original report on San Bernardino, we noted: “Everyone interviewed for this report made direct or indirect reference to the city charter one way or the other. And almost everyone indicated ‘I have never seen a more dysfunctional design for a city government than the provisions contained in the city charter.’ It is an understatement to say it is designed to diffuse power and prevent sound management, accountability, and transparency. It actually seems worse than the old commission form of government with all its fiefdoms. At least there you could hold a commissioner accountable. That being said, the people of the city have operated with that system for so long and they know so little about other options, that they cannot possibly understand it could be any other way. It is going to take some reformers to come along who can convince them to bring their system into the 21st (or even 20th) century. Then the political culture can start to change.”

Indeed, San Bernardino’s own, current version of its plan of debt adjustment, the committee in its written report to the City Council noted: “identified the city’s charter as a barrier to efficient, effective government, because it is overly complex, hard to understand, and contains elements that are inconsistent with best practices for modern municipal government…Subsequently, the charter committee has continued its work to develop recommendations for a new or substantially revised charter that reflects the principles of good governance and meets the needs of the community.” The draft plan notes: “the charter committee has continued its work to develop recommendations for a new or substantially revised charter that reflects the principles of good governance and meets the needs of the community.”

Nevertheless, any changes will confront challenges: it was just 14 months ago that the city’s voters rejected an earlier charter committee proposal to remove police and firefighter pay from the charter, which would have allowed those salaries to be set by negotiation, rather than a formula based on what other cities (larger municipalities with higher tax bases) pay, albeit voters did agree to a change to end the practice of paying terminated city employees while they wait for an appeal of their employment. (California law only allows changes to a municipal charter if approved by voters in a November election in an even-numbered year.) Nevertheless, there seems to be growing awareness of the need for governance change: In a survey the charter committee conducted last year, only 8% of 440 complete responses agreed that the charter should not be changed: 51% responded it should be revised; 42% said it should be replaced. For the committee members, of course, the harder question is just how voters—and leaders—believe it ought to be changed.

Options for Averting Municipal Bankruptcy

January 28, 2016. Share on Twitter

Flint’s Future. The U.S. Senate expects to consider bipartisan legislation today to address the unsafe water crisis in Flint as part of a bipartisan bill on energy policy—during which Sens. Gary Peters and Debbie Stabenow (D-Mi.) are expected to offer an amendment aimed at protecting the water supply in Flint. The underlying bill would update building codes to increase efficiency, strengthen electric grid safety standards, and promote development of an array of energy forms, from renewables such as solar and wind power, to natural gas, hydropower and even geothermal energy—and would accelerate federal approval of projects to export liquefied natural gas to Europe and Asia and reauthorize a half-billion dollar conservation fund to protect parks, public lands, historic sites, and battlefields. The Senate action comes as Sen. Minority Whip Dick Durbin (D-Ill.) said as many as 7,000 children have been “poisoned because of lack of proper government oversight” in Flint, with Senate Minority Leader Harry Reid (D-Nev.) adding that Michigan Gov. Rick Snyder had tried to “save a few bucks with the water and, in the process, poisoned lots of people.”

Sen. Reid added, however, that he thought the Senate should focus on other municipal water supplies beyond Flint, noting: “We have a lot of communities around this country who have lead pipes, and a very deteriorating water system.” The federal action comes as, in Lansing, the Michigan Legislature is poised today to approve $28 million in additional funding to address the lead contamination of Flint’s water—appropriations which would include funds for more bottled water and filters and services to monitor for developmental delays in young children, as well as help the city with unpaid water bills and cover testing, monitoring, and other costs—the second round of state funding allocated since the lead contamination was confirmed in the fall in the wake of a decision by state regulators two years ago to allow Flint to not treat water for corrosion after the city switched its supply in 2014—a decision with likely fatal consequences because of the ensuing leaching of lead from old pipes into Flint’s drinking water. The action today comes a day after Gov. Rick Snyder promised he would seek more funding for Flint in his upcoming budget proposal. It also comes a day after the Governor named a group of 17 medical and field experts, including a doctor and Virginia Tech Professor Marc Edwards, who helped expose the Flint water contamination crisis, to a committee charged with identifying long-term solutions.

Spinning the Dial for Municipal Bankruptcy. New Jersey’s top elected officials Tuesday announced an agreement with Atlantic City Mayor Donald Guardian to allow increased state intervention in an effort to keep the municipality out of bankruptcy—an agreement proposed by Gov. Christie and backed by the city’s elected leaders under which the state would provide additional layers of state oversight and new revenue sources. Gov. Christie introduced the plan accompanied by New Jersey Senate President Steve Sweeney and Atlantic City Mayor Don Guardian; the Atlantic City Council passed a resolution late on Tuesday to support the new proposal. The dynamic duo said the new legislation would give the state increased power over Atlantic City finances, including restructuring municipal debt, changing collective bargaining agreements, and selling off city-owned assets: it would provide a five-year state takeover compared to the 15 years Sen. Sweeney had proposed.

With the state already effectively under some state control due to the Governor’s imposition of an emergency manager, Tuesday’s actions imposed a more sweeping state takeover. Gov. Christie said he wants action by the end of next month by the state legislature to allow the state to restructure the city’s debt and terminate municipal contracts, including with labor unions. Under the proposal, the state would control the city for five years, with authority to allow the state to dissolve city departments, consolidate and privatize municipal services, and sell city assets—all proposals which had been included in a recent report by the city’s state-imposed emergency manager, Kevin Lavin.

In addition, under the Governor and Presidential candidate’s new proposal, the state would reconsider a version of legislation that the Governor last month vetoed, legislation intended to boost cash flow and stabilize Atlantic City’s tax base with fixed payments in lieu of property taxes from its famed casinos. Gov. Christie did not say whether the takeover proposal would address $153 million Atlantic City owes the Borgata casino in tax refunds. (Atlantic City last month missed a $62 million tax refund payment owed to the Borgata on Dec. 19.)

The Governor’s action—and muted support by Mayor Guardian and the Council—came just as the Mayor had called for an City Council emergency meeting to consider whether to file for municipal bankruptcy—a decision which would have required a two-thirds’ approval to seek such authority from New Jersey’s Local Finance Board, which oversees the city’s budget. Mayor Guardian told his colleagues he could see “no human] way” Atlantic City could pay the $160 million of casino property tax appeals it owes to the Borgata Casino Hotel & Spa.

Mike Cerra, assistant executive director of the New Jersey League of Municipalities, called the agreement “a positive development” since neither a municipal bankruptcy nor long-term state takeover would be beneficial to the local governments in the state; he said a municipal bankruptcy would have sent negative message to the municipal bond markets that New Jersey would allow a distressed municipality to reach that stage of insolvency, noting: “Nothing good comes out of a bankruptcy for a local government: Neither a bankruptcy or a full state takeover were desirable options.” New Jersey, where a municipality may only file for chapter 9 municipal bankruptcy with state permission, has only had one city, Camden, previously file (in 1999, but the case was subsequently dismissed). The state’s Division of Local Government Services has that authority, as well as the authority to approve budgets for distressed localities to ensure they can pay their debts.

My Old Kentucky Home. With municipal bankruptcy an increasingly hot topic amongst state and local leaders across the country—and in the U.S. Territory of Puerto Rico, Kentucky State Rep. Brad Montell (R-Shelbyville) might want to be among those considering what is happening in New Jersey, as he is asking whether Kentucky should reconsider its municipal fiscal assistance and municipal bankruptcy laws and programs. Until last August, no Bluegrass city had ever filed for chapter 9 municipal bankruptcy in the state; counties are not permitted to file; two municipal entities—utility districts—have previously filed. As part of the look-back, Rep. Montell is wondering whether Kentucky should develop a program—perhaps similar to New Jersey’s—to assist fiscally distressed municipalities, noting: “It seems to me we need to have sort of a blueprint of what authority the state government has in these instances.” U.S. Bankruptcy Judge Alan C. Stout is currently considering whether to allow Hillview, the Louisville suburb of 9,000 to proceed with its case—a case triggered by the municipality’s loss and consequent $11.4 million legal judgment after losing a lawsuit to Truck America Training. House Concurrent Resolution 13, filed by Rep. Montell, said defaults and municipal bankruptcies in Alabama, California, Pennsylvania, and Rhode Island have increased awareness of municipal bankruptcy: his proposal would direct the Kentucky Legislative Research Commission to conduct a study of municipal bankruptcy, including laws, and prevention practices employed by other states.

Today, more than half of the states and the District of Columbia have implemented municipal debt supervision or restructuring mechanisms to assist municipalities: creating programs to offer assistance, refinancing, oversight, and other mechanisms to avoid default. Such state programs, moreover, appear to have been exceptionally successful in avoiding defaults or bankruptcies: municipal bankruptcy ace James Spiotto, with whom the National League of Cities worked for over a decade to secure Congressional approval and former President Reagan’s signing of municipal bankruptcy legislation, testified last month before the U.S. Senate Judiciary Committee that such state “second looks” appear to have been effective by a six-one margin in avoiding Chapter 9 bankruptcy in the 24 states which authorize a city, county, or other municipal entity to file.

Rep. Montell’s proposed study would include a review of other state laws, and the practices that they have employed in order to intervene in a city or county financial crisis, or, as he put it: “We just want to get some answers, and see how other states have handled this in case we need to take action next session.” His resolution also cites the possibility of credit rating downgrades for the entire state due to the unhealthy financial health of its governments, as another reason to study Chapter 9 further, adding that Kentucky should look at its bankruptcy law, because the budgets of cities, counties, and school districts could realize growing fiscal challenges due to their mandated costs to participate in state-run pension plans, along with other stressors such as labor costs, noting: “We want to get our financial house in order and I’m confident we will…That’s one reason we want to be on top of [the bankruptcy law] as well.”

In his testimony last month, Mr. Spiotto testified that effective programs aimed at avoiding municipal financial distress and bankruptcy have been “well demonstrated” by the Municipal Assistance Corporation for New York City in 1975, the Pennsylvania Intergovernmental Cooperation Authority for Philadelphia in 1991, and the District of Columbia Financial Responsibility and Management Assistance Authority for Washington, D.C. in 1995—adding that the states of Florida, Indiana, Michigan, Nevada, New Jersey, New York, North Carolina, Pennsylvania, and Rhode Island include a variation on a provision allowing for the appointment of a financial control board or commission, emergency managers, receivers, coordinators, or overseers for troubled local governments. Thus, unsurprisingly, the Kentucky League of Cities has said it supports Rep. Montell’s resolution, which could lead the state to institute an emergency assistance program.

Human & Fiscal Disruption and Municipal Bankruptcy

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December 11, 2015. Share on Twitter

Human & Fiscal Disruption and Municipal Bankruptcy. Even as the City of San Bernardino is trying not just to get back to normalcy and resume efforts to finalize its proposed plan of debt adjustment to submit to U.S. Bankruptcy Judge Meredith Jury in the wake of last week’s terrorist attack, the aftershocks of the event—in the form of bomb threats—have surged. The calls are exacting a fiscal toll: Hours after the rampage which left 21 dead and 14 wounded, and even as some of those victims were being treated, a code yellow bomb threat was called in to the Loma Linda University Medical Center, according to a hospital spokeswoman. Even though fire and police officials have been unable to find any connection between the threats from multiple sources, and all the threats had been cleared without any weapons found; the threats themselves are imposing not just unanticipated costs, but also fiscal instability and erosion: the mere existence of the threats can hardly, after all, serve to enhance the city’s tax base or encourage either business or residential investment—but they do exact a fiscal and emotional toll, even if assessing the fiscal toll is intangible.

Rather, as Jim Buermann, president of the Police Foundation, notes, the threats themselves are dangerous — and despicable: “You can’t evacuate patients in ICU or critically injured patients unless you truly believe something will happen, because you could be endangering them. They literally could be causing someone to die…Especially in this time when so many people are on edge. This has had a very traumatic impact on the Inland Empire.” The most recent example came Wednesday with a hoax when one student called another student at Carter High School in Rialto, leading Rialto Unified School District officials to put the school on lockdown for an hour—just two days after the school had been had been searched in the wake of finding multiple photos of the high school on the cell phone of Syed Farook, the health inspector responsible for most of the district’s schools until he and his wife Tashfeen Malik killed 14 people and wounded 21 others, according to investigators—and just prior to the arrest by San Bernardino Sheriff’s deputies of another person on suspicion of placing bomb threats to three separate places — Loma Linda University Medical Center, Grand Terrace High School, and a San Bernardino apartment complex, according to the department. The San Bernardino City Unified School District is investigating a set of messages falsely claiming on Snapchat and Instagram that all schools in San Bernardino and Redlands would be closed. This is a city in municipal bankruptcy—and now on the precipice of fear.

While Mr. Buermann told the San Bernardino Sun that these kinds of threats are not necessarily common in the wake of a traumatic event, they can make an adverse event more likely: “The shooting, pursuit, that whole thing, that sets people on edge…And sometimes it’s enough to nudge someone who’s a very unreasonable human being toward doing something that’s just irrational or criminally mischievous to see if I can add to the angst that people have…Or, in the worst case scenario, it’s someone trying to test responses.” San Bernardino County Sheriff John McMahon warned, in a public statement: “Citizens should be wary of possible hoax messages and follow verified law enforcement social media accounts and press releases. Our primary responsibility is to make sure our communities are safe and we are committed to continue to ensure that.”

Last week’s mass shooting in San Bernardino was, reportedly, planned up to a year in advance—that is, almost simultaneously with the city’s planning of its plan of debt adjustment to submit to U.S. Bankruptcy Judge Meredith Jury. Put another way, there have been parallel, meticulous plans: one to devastate a municipality and maim its people, and one to give it a sustainable future. The attack was not an event which could have been anticipated—much less incorporated into the city’s plan of debt adjustment to submit to Judge Jury. It raises the question with regard to mass tragedies and their impact on municipal coffers: after all, San Bernardino could hardly afford such devastation and loss of lives in the midst of the longest municipal bankruptcy in U.S. history: are other municipalities prepared for comparable tragic eventualities?

The Precipitous to Recovery. Matthew Dolan, the fine Detroit Press columnist, this morning marked Detroit’s “one year of freedom today from the nation’s largest bankruptcy,” noting, nevertheless, that not every Motor City resident is necessarily overjoyed. He acknowledged that while Detroit is financially solvent, that it has thousands of new streetlights and its world class Detroit Institute of Art, and a balanced budget; yet it still “is struggling to find new solutions to old problems: endemic blight, vacant land, high crime, struggling schools, and a looming pension bill that city leaders are struggling to pay off.” Or, as he quotes the godfather of municipal bankruptcy, Jim Spiotto: “[I]t would be shortsighted to say that it is already recovered.” Indeed, Mr. Dolan noted that on Wednesday night at a community event at Wayne State University featuring the architects of Detroit’s bankruptcy plan of debt adjustment, organizers were forced to halt the event after about an hour—and the evening’s scheduled, featured speaker, Mayor Mike Duggan, never even reached the stage.

The event, sponsored by the Detroit Journalism Cooperative and Detroit Public Television had invited Mayor Duggan, Gov. Rick Snyder, and retired U.S. Bankruptcy Judge Steven Rhodes, who oversaw the court case, to provide their insights and assessments of the city’s progress; however, the event was brought to an early close after interruptions by some upset members of the crowd of more than 200 who questioned whether the nation’s largest ever municipal bankruptcy had been legitimate and successful—protests which apparently reached their zenith after Gov. Snyder began speaking about his appointment of Detroit’s emergency manager, Kevyn Orr, and defended the city’s entrance and exit from chapter 9 municipal bankruptcy as a last resort but a necessary one, telling the audience: “We eventually got to bankruptcy, but that was after three years” of efforts to fix the city’s balance sheet outside of court.

The session was brought to its untimely end when the celebrated lead rhythm guitar player of the ever judicious Indubitable Equivalents, retired U.S. Bankruptcy Judge Steven Rhodes, could no longer be heard by audience members—with the end coming after he expressed some of his concerns about Detroit’s looming public pension liabilities and its near bankrupt public school system. Mr. Spiotto, unsurprisingly, provided a broader perspective—especially in light of the near decade-long efforts we joined in nearly three decades ago to get the current version of chapter 9 municipal bankruptcy signed into law by former President Ronald Reagan: he noted that since then, there have been 295 Chapter 9 municipal bankruptcy filings, most of which involved municipal utilities and special tax districts: only 54 involved cities, counties, towns, or villages—and most of those ended up having their bids rejected by the court or came to an alternate solution outside of a bankruptcy judge’s approved plan of debt adjustment. Mr. Spiotto told the audience: “The real test is going to be five or ten years from now,” when, he said, the key issues will involve whether the city has under control the spiraling costs and dwindling tax revenue that forced its march into bankruptcy court.