Leaving Municipal Bankruptcy: Such Sweet Sorrow

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eBlog, 1/03/17

Good Morning! Happy New Year! In this a.m.’s eBlog, we consider the next—and final—steps for the City of San Bernardino to exit the nation’s longest in U.S. history municipal bankruptcy, then we consider the underlying fiscal strengths that could be critical to Atlantic City’s emergence from state control and back to solvency. Finally, we try to assess whether one of President Obama’s final laws—expanding Petersburg’s national park—might help the fiscally ailing municipality, before finally comparing and contrasting the fiscal dilemmas of two U.S. territories: Puerto Rico and Guam.

Leaving Chapter 9. In just over three weeks, San Bernardino could receive its exit clearance from U.S. Bankruptcy Judge Meredith Jury from the longest chapter 9 municipal bankruptcy in U.S. history. That will reduce court-related costs and burdens to the city; the real issue will be with regard to how it implements its plan of debt adjustment, with Mayor Carey Davis noting: “The city is poised and setting the stage for quite a bit of continued growth and improvements for 2017.” But, in the wake of the long bankruptcy, the new city which emerges will be different: it will have a new charter as soon as California Secretary of State Alex Padilla confirms the city’s election results, clearing the path for the city to begin implementing a new charter much more similar to those of other, successful cities—changes such as moving to a system where the City Council votes with the Mayor to set policy which is then implemented by the city manager. That change will take effect immediately; other changes will need to be implemented by the City Council approving changes to the municipal code. For her part, Judge Jury noted the city’s plan of debt resolution did not hinge on the charter approval; nevertheless, she praised the outcome: “(City officials) successfully amended their charter, which will give them modern-day, real-life flexibility in making decisions that need to be made…There was too much political power and not enough management under their charter, to be frank, compared to most cities in California.”

There were other critical steps to this longest-ever plan to exit municipal bankruptcy, including: catching up on audits for the first time since 2010, the city caught up on its audits, perhaps allowing it to operate in 2017 under less suspicion and with eligibility for more state and federal grants; significant outsourcing, especially with the transfer of the 137-year old Fire Department to county control; redevelopment at the Carousel Mall, and attempts to alleviate homelessness; albeit Mayor Carey Davis notes: “As you can see, there’s a full plate ahead of us in 2017…I’m sure there will be some unexpected needs that will be in place with a stronger city hall, a city hall that is doing a much better job with our financial reporting, but I think that with the changes of 2016 we’ll have a strong front to show investors.”

Spinning the Wheel of Misfortune. A key challenge for Atlantic City—and the State of New Jersey, which has assumed control over the city, relates to casinos: how to emerge from over reliance on gambling, which produces some 67 percent of the city’s revenues. Despite losing half its value in Atlantic City over the past decade, the gaming industry appears to remain a critical component of Atlantic City’s future. Notwithstanding the multiple bankruptcies of former casino owner and now President-elect Donald Trump in the fabled city, the industry still represents a more than $3.7 billion economy: in 2015, the casino industry totaled revenues of $3.7 billion, $2.4 billion of which was from gambling, according to New Jersey state figures. Through the first nine months of last year, there was $2.8 billion in total revenue. Ironically, the impact of Trump Taj Mahal Casino Resort’s closing in October remains to be determined. Still, as seemingly mouth-watering as such revenues would appear to be, they contrast with the more than double $5.2 billion in casino revenues from a decade ago—since then competition from outside the market has contributed to the closing of five casinos since 2014. So it seems to be a positive sign that over the past couple of years, Atlantic City properties increased their non-gaming attractions, with the increase in non-gaming attractions demonstrating a steady growth in non-gaming revenue. Indeed, between 2012 and last year, non-gaming revenue nearly quadrupled from $252 million to more than $998 million, according to state records.

A Fiscal Battlefield. President Obama has signed into law new federal legislation for a major expansion of Petersburg National Battlefield: the battlefield commemorates the Civil War’s longest battlefield conflict, marked by bursts of bloody trench warfare spanning some 10 months from 1864 to 1865. The new law, however, does not pay for the addition of more than 7,000 acres to the existing 2,700 acres of rolling hills, earthworks, and siege lines already under protection at Petersburg. Supporters of the new law say the larger boundary would not only protect historic sites from commercial development, but also give park visitors a more comprehensive understanding of the Petersburg campaign, which left tens of thousands of men dead. According to National Park Service figures, the park draws approximately 200,000 visitors a year, far fewer than such higher-profile sites as Gettysburg in Pennsylvania, with more than 1 million tourists annually. Nevertheless, the park has proved key to the area economy, bringing in some $10 million a year. Officials hope expanding the battlefield’s protected footprint would bring in even more visitors. However, the newly enacted legislation does not include any new funding.

The land changes come as the City of Petersburg, trying to unwind nearly $19 million in unpaid obligations, having reduced its employees’ pay and experienced the repossession of its firefighting equipment, is trying to determine how the federal changes might affect its fiscal distress. Today, according to National Park Service figures, the park draws about 200,000 visitors a year. Notwithstanding, the Petersburg park plays a key role in the regional economy, bringing in some $10 million a year. Thus, officials hope expanding the battlefield’s protected footprint would bring in even more visitors—visitors who might help enhance the city’s tax base. That might happen, as the Park Service’s first priority is expected to focus on the acquisition of still more private property and most vulnerable to commercial development. While that would risk creating a fiscal issue due to foregone property tax revenues, it might have the counter impact of raising the assessed values of property within the city limits—and create a means to help the city grapple with nearly $19 million in unpaid obligations.

Are Fiscal Crises Contagious? A question has arisen whether the promise of the newly enacted PROMESA law to provide a quasi-municipal bankruptcy mechanism for the U.S. territory of Puerto Rico to address its fiscal meltdown might be contagious for the territory’s U.S. counterpart Guam, where Fitch Ratings has cut Guam’s business-tax revenue bonds to junk, noting that PROMESA “fundamentally” alters the premise used to rate debt issued by U.S. territorial governments. Even though Guam is nearly 10,000 miles away from Puerto Rico, analysts claim the new Congressional law has set a precedent which could let other U.S. territories escape from obligations to their municipal bondholders. In contrast, S&P Global Ratings analyst Paul Dyson maintains an A rating for Guam—a rating which he notes reflects the territory’s ability to pay investors, adding that the new federal PROMESA law “currently applies only to Puerto Rico.” Indeed, Mr. Dyson points out that: “We have no indication that Guam is going to do something similar to PROMESA.” S&P reports that Guam’s economic outlook is stable: the territory is host to U.S. Air Force and Navy bases, and its economy likely to benefit from U.S. plans to expand its military operations on the island, which is the closest U.S. territory to potential hot spots in Asia. In contrast, however, Guam has not adopted a balanced budget; it has rising pension liabilities, and growing debt—debt of some $3.2 billion in obligations for a population of about 165,700, according to data compiled by Bloomberg.