Leadership & Governance in Municipal Bankruptcy

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November 20, 2015. Share on Twitter

Leadership & Governance in Municipal Bankruptcy. An important factor in the Detroit, Central Falls, and San Bernardino municipal bankruptcies was the absence of leadership—or, worse, depravity by elected and/or appointed leaders. Lack of accountability to citizens, and lack of a mechanism or means of oversight where the municipal elected leadership has failed, or such leadership has simply become dysfunctional is a severe hurdle in states where such state authorization to file for chapter 9 does not provide any state oversight authority—such as in Michigan, Rhode Island, or other states. Thus it mayhap marked an important turning point this week for San Bernardino’s elected leaders to facilitate the early departure of its City Manager, Allen Parker, who began as manager in February of 2013, so that one might say he has been at the very eye of a most powerful fiscal storm—albeit an expensive remedy for a municipality in bankruptcy: the offered and accepted severance package of nearly a third of one million dollars is, after all, a high price for a bankrupt municipality, and means there will be that much less for the city’s post-bankruptcy rebuilding. Nevertheless, it was a vital step if the city is to be able to regroup and get its fiscal recovery act together.

Indeed, it is interesting to learn of Mr. Parker’s post-departure perspective (he officially departs the city in six weeks, leaving a Twilight Zone interlude), and his perceptions with regard to the issues and challenges he perceives for his city and what San Bernardino’s path forward could be. Yesterday, in an interview with the San Bernardino Sun, he noted that a “lot of people want to hold onto what San Bernardino was when they grew up, and such,” adding, however: “Those days are gone.” Speaking to his governance perspective, he said the city had basically been “run for many years by Mr. Penman,” referring to the long and influential tenure of San Bernardino City Attorney James F. Penman, who, while he was not a member of the City Council, believed that as an elected official it was his role to enter policy debates—a belief, Mr. Parker noted, which contributed, from his perspective, to a lack of professional staff with the ability to manage the city. At the same time. Mr. Parker said he felt that governing dynamic was changing—that there is what he described as a “good core of staff to move forward.”

The process—and the fiscal outcome of the governance process—which led to Mr. Parker’s departure, however, occasioned, unsurprisingly, a less than supportive citizen reaction at a closed session City Council meeting last evening, when the Council members received unhappy feedback with regard to the reports of Mr. Parker’s generous severance package—a package which appeared to be the cause of visible anger of some of the city’s elected leaders, albeit leaders who declined to speak publicly about this week’s turn of events. Nevertheless, one citizen written comment, read aloud at the session by the City Clerk, noted: “Mr. Parker had every opportunity to negotiate a contract at the time he was hired…He and the city agreed that no severance pay was appropriate. I agree. That constitutes a gift of taxpayer money.” The commenter added that while a smaller severance might have been justified because the City Manager had chosen to come to San Bernardino at a time of significant fiscal distress and political dysfunction, the idea of getting rid of Mr. Parker was one that received his enthusiastic endorsement, but on the issue of at what price, the constituent noted: “Do I want to get rid of Parker? Yeah, I agree with you…Do I think we should pay him a dime? No…You’re going to have hell to pay if you give him a penny.”

Offering a Potential Alternative to Municipal Bankruptcy. With Congress seemingly unwilling to consider providing Puerto Rico the option of bankruptcy available to every other corporation in America, the Senate Environment and Public Works Committee, which has jurisdiction over the U.S. territory, is developing a legislative proposal which it believes could help Puerto Rico via what one staffer likened to a federal control board, such as was facilitated for the District of Columbia—albeit, as the Romans would put it, tempus fugit, or the time to act is fast expiring: ever moody Moody’s credit rating service expects Puerto Rico to default on a portion of a $354 million payment due next month; the Commonwealth has already defaulted on municipal bonds issued by its Public Finance Corp. The potential proposal in Congress comes as the Puerto Rico legislature earlier this week approved legislation to establish a local fiscal adjustment board, whose five members would be appointed by the Governor—although Delegate Pedro Pierluisi, Puerto Rico’s non-voting Member of Congress, rejected the idea of a federal board to oversee the territory’s finances, claiming it smacked of colonialism. Nevertheless, the emerging concept, successful in D.C. and New York City under the incomparable leadership of former Empire State Lt. Governor Dick Ravitch—as well as consistent with the suggested approach of Senate Judiciary Committee Chair Charles Grassley (R-Iowa)—who will hold a hearing on Puerto Rico on December 1st to learn “more about the root cause of the problem and discussing possible solutions,” according to his spokesperson, might point towards increasing consensus, even as the Obama Administration’s plan, supported by Congressional Democrats and the Puerto Rican government, focuses on granting Puerto Rico broad municipal bankruptcy powers—seemingly, to date, a non-starter in Congress.

Here Come Da Judges. As Chicago’s attorneys, earlier this week, sought to convince the Illinois Supreme Court that the city’s plan to save its pension program from insolvency does not violate the Illinois Constitution’s protection against reduced benefits, because it ensures there will be, for decades to come, money to keep those checks moving—or as the Windy City’s attorney Stephen Patton put it: “The participants are immeasurably better off with it, than without it”— with, in the second public pension-overhaul case before Illinois’ high court in eight months, Mr. Patton seeking to differentiate his arguments from a separate, landmark pension plan involving state-employee retirement funds which the Illinois Supreme Court has previously rejected; the path to legal success promises to be steep. Attorney Patton testified that shoring up Chicago’s pension accounts ought to trump (no Presidential campaign pun) the benefit reductions for 75,000 Windy city workers and retirees. The challenge: Illinois’ Constitution prohibits a promised pension from being “diminished or impaired,” but the issue before the Justices is a Legislature-endorsed plan which reduces automatic annual pension increases, while requiring a $750 million city property-tax hike over five years to cut down a $19.5 billion deficit in the next four decades. During this week’s oral arguments in the City of Chicago’s appeal of a July lower court ruling which voided the city’s overhaul of its laborers and municipal employees’ funds, the incomparable Matt Fabian of Municipal Market Analytics perhaps best captured the pessimism about the likely outcome and its implications: “Almost no one is optimistic in the market…It comes down to what the city does after.” The ever so wise municipal bankruptcy guru and Chicago resident Jim Spiotto notes: “The presumption is with the lower court so it’s always an uphill battle, but trying to read the tea leaves in oral arguments is always difficult: It will come down to whether the court views the pension clause as absolute or whether there is an ability on behalf of governmental bodies and workers’ representatives to come up with a bargained-for resolution,” adding that the issues and questions raised open the door to a larger, national question with regard to how to balance a state or municipality’s need to meet its obligations without harming its economic viability: “You need a resolution that allows a municipality to meet its obligations in a reasonable way that doesn’t destroy a government’s ability to grow and prosper.”

This Little Piggy Had None. Luzerne County, Pennsylvania leaders report they have insufficient fiscal resources to meet the municipality’s expenses for the remainder of this calendar year—and not even enough to make a December 15th $8 million debt service payment—with the municipality’s director of budget and finance, Brian Swetz, noting the county currently has only about $4 million in its general fund, even as it believes it will need $20 million to fund the government for the rest of the year—the amount to also cover payments to most vendors. Moreover, in order to meet other costs, such as payroll, health insurance, and debt payments – even without paying its vendors, the county would need $16 million. Municipal staff meetings this week made clear that with personnel costs consuming the bulk of the municipality’s budget; nevertheless, even were the county to forego making such payments for the remainder of the year, such cuts would be insufficient to cover the looming debt payment: they would only save about $7.5 million. Indeed, absent municipal bankruptcy, it appears the county’s only fiscal relief option would be to petition the Pennsylvania Court of Common Pleas for authority to borrow funds—a process, especially in the middle of holidays, for which there is little time. Even as the county is scrambling to find fiscal alternatives to stave off insolvency, it is beginning the process to define essential personnel and services—and the alternatives and consequences of a potential default on its Dec. 15th municipal bond payment—a potential default which would, as Mr. Swetz ruefully noted, affect the county’s “2016 tax anticipation note, the 2016 budget process, a lot of things. If you bought bonds in Luzerne County, this sends a message as an investor…It’s not going to send a good message.” The looming insolvency is already forcing a prioritization of the timing and order of vital municipal service shutdowns—especially as the county is legally required to provide some services, such as those provided through the courts, prison, and human services.