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.