TheExceptional Governing Challenges on Roads to Fiscal Recovery

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eBlog, 12/02/16

Good Morning! In this a.m.’s eBlog, we consider the hard role to recovery not just from San Bernardino’s longest-ever municipal bankruptcy, but also the savage terrorist attack a year ago. Then we venture East to observe the evolving state role in New Jersey’s takeover of Atlantic City, where the new designee named by Gov. Chris Christie, Jeffrey Chiesa, yesterday introduced himself to residents and taxpayers, but offered little guidance about exactly how he will usurp the roles of the Mayor and City Council in governing and trying to get the famed boardwalk city out of insolvency and back to fiscal stability. Finally, we look north to the metropolitan Hartford, Connecticut region, where the municipalities in the region are seeking to work out fiscal mechanisms to address Hartford’s potential municipal bankruptcy in order to ensure no disruption of metropolitan water and sewer services—a different, but in this case critical element of a “sharing economy.”  

The Jagged Road to Chapter 9 Recovery. It was one year ago today that terrorists struck in San Bernardino—the city in chapter 9 municipal bankruptcy longer than any other city in U.S. history, marking, then, a day of 14 deaths—with victims caught in the crossfire of gun shots and carnage in the wake of the wanton attack by Syed Rizwan Farook and Tashfeen Malik—and a horror still not over, as it will be another nine months before the trial against Enrique Marquez Jr., who has been charged with buying some of the weapons which were used in the attack, commences in September—months after the beleaguered city anticipates exiting from bankruptcy. Because the shootings took place at a San Bernardino County facility in San Bernardino, the long-term recovery has been further complicated from a governance perspective: many of the shooting survivors are accusing San Bernardino County of cutting off much-needed support for the survivors of the attack, including refusing to approve counseling or antidepressant medication. Others, who were physically wounded are seeking, so far unsuccessfully, to get surgeries and physical therapy covered. The San Bernardino County Board of Supervisors earlier this week convened a closed-door session at which survivors said they felt betrayed and abandoned, left to deal with California’s complicated workers’ compensation program without guidance or help. Their health insurers will not cover their injuries because they occurred in a workplace attack. Congressman Pete Aguilar (D-Ca.), whose district includes San Bernardino, reports that his hometown had been added to a list of cities with which people are familiar for a terrible reason, such as Littleton, Colo., or Newtown, Conn. Nevertheless, he is defiant, insisting “We will not be defined by this tragedy.”

However, murder rates in the city have been climbing: the city of just over 200,000 is grappling with a spike in violent crime, homicides especially: to date, this year, the city has reported 49 killings, already more than last year’s total, which included the terrorist victims—its homicide rate tops that of Chicago, which has become the poster child for big-city violent crime and is on pace for more than 600 killings this year. San Bernardino Police Chief Jarrod Burguan, however, said the crime wave is not unique to the chapter 9 municipality—a currently bankrupt city where empty storefronts and pawn shops have long lined downtown streets. Nevertheless, Brian Levin, a criminal justice professor at California State University, San Bernardino, who studies hate crimes, yesterday noted: “we’re a better community now, even though we’re hurt.” Professor Levin is one who, in the days and weeks which ensued after the mass tragedy, met with faith leaders, law enforcement, and families of the victims—where he discovered a unity of shock and shared pain. Today, he notes: “The attack will always be a part of our history…But here’s the thing: so will the heroics of those police officers and first responders and medical staff, and so will the grace of the families. We’re writing the rest of the history. The bastards lost.” Now the city awaits early next year for emerging not just from the physical tragedy, but also the longest chapter 9 municipal bankruptcy ever.  

Atlantic City Blues.  Jeffrey Chiesa, a former New Jersey Attorney General, U.S. Senator, and, now, Governor Chris Christie’s designee to run the state takeover of Atlantic City, yesterday introduced himself at a City Council meeting and took questions from city taxpayers and residents. He provided, however, in this first public meeting no details on plans to address either the city’s fiscal plight—or its interim governance. He reported the State of New Jersey does not yet have a plan to address the city’s $100 million budget hole, much less to pay down the Atlantic City’s $500 million debt, noting: “It has been two weeks…My plan is to do what I think is necessary to create a structural financial situation that works not for six months, not for a year, but indefinitely so that this place can flourish in a way that it deserves to flourish.” He noted he and his law firm will be paid hourly for their work, albeit he did not report what that hourly rate will be—especially as the state retention agreement remains incomplete, albeit promising: “We’ll make sure that’s available once it’s been finalized.” Related to governance, he noted that—related to his state-granted authority to sell city assets, hire or fire workers or break union contracts, among other powers—he would listen to residents and stakeholders before making major decisions: “What this designation has done is consolidate authority, per the legislation, in the designee to make those decisions…That does not mean that I’m not listening. That does not mean I’m pretending I have all the answers without consulting with other people.” Describing the seaside city as a “jewel” and “truly unique,” he added that he understood concerns about an outsider overseeing the city: “I know that most of you don’t know who I am…All I can do is be judged by my actions and the decision that I make, and I hope you give me time to do that.” He did say that he would have to move swiftly to address immediate issues, likely referring to reaching agreements with casinos to make payments in lieu of property taxes, and then focusing on the city’s expenses—noting: “That timeframe is pretty compressed…So we will take the steps we need to take.”

Fiscally Hard for Hartford. As we have recounted in the fiscally strapped municipality of Petersburg, Virginia, municipal fiscal insolvency cannot occur in a geographic vacuum: whether in Detroit—or as we note above today, in San Bernardino, fiscal insolvency has repercussions for adjacent municipalities. So too in Hartford, the Metropolitan District Commission (MDC) completed its planned $173 million municipal bond sale late last week, temporarily ending the controversy over a $5.5 million reserve fund. Under the provisions, that fund would be paid by seven of the eight MDC municipalities to cover the sewage fee for the second half of 2017 if the City of Hartford is unable to contribute its share, as it has indicated it will be unable to do. Ergo, it means that adjacent Windsor, the first English settlement in the state which abuts Hartford on its northern border, with a population of under 30,000 would contribute over $700,000, with East Hartford contributing about $900,000. The other group members in the metro region, Bloomfield, Newington, Rocky Hill, West Hartford, and Wethersfield, would pay the remaining $900,000, proportionately. One outcome of this watery alliance and experience is that the MDC will, when the state legislature convenes next February, propose two laws to avoid the necessity for a reserve fund in the future, with MDC Chairman William DiBella suggesting that the eight member municipalities be required to set aside as untouchable the percentage of their property taxes the cities and towns already know they will owe to the MDC for sewage services. (Currently, property taxes go into the municipalities’ general funds, and the cities extract the sewage fee when it is due, provided the funds are, in fact, available; however, like water at the tap, that has not always been the experience.) In effect, the consortium is recommending a selves-imposed budgeting municipal mandate, with Chairman DiBella noting: “Every town would have to do it. That way, one town can’t stiff us. You wouldn’t have to go out and borrow money or take charity and hope you get it back.” As the Chairman noted: “We never had a problem like this…Who thought a town would go bankrupt? With the proposed law, if a town were to go bankrupt, the sewage fund would be in a dedicated account and can’t be reached,” or touched in a bankruptcy proceeding. Another potential resolution would be to allow the MDC to borrow money over a long-term for operating expenses. The MDC would then be able to pay Hartford’s $5.5 million bill and look for a city reimbursement in other ways.

There has been increased pressure for a resolution—especially in the wake of municipal bond holders of the MDC, holders who, last week, made clear to the authority they would not buy its municipal bonds if a reserve fund was not put into place. That appeared to be a key incentive for the board’s action earlier this week for the MDC board, including representatives of all eight municipal members, to vote unanimously to adopt the water and sewer service provider’s 2017 budget, which contains the unwelcome “bail-out” fund for Hartford—albeit Chair DiBella said there would be no guarantee the agency could cover a Hartford default or continue operating or pay the bondholders. A key part of the incentive to try to work together relates to potential fiscal contagion: because of concerns over Hartford’s finances and fiscal condition, credit rating agencies have recently downgraded MDC’s bond rating from AA+ to AA, a downgrade expected to cost the agency and its member towns an estimated $500,000 in a higher interest rate for the bonds. The towns, unsurprisingly, are apprehensive the credit rating agencies will now consider changing their credit ratings. In contrast, creating the reserve fund would keep MDC’s credit rating where it is: thus, MDC officials hope that passing the two proposed laws would prompt the credit rating agencies to return its rating to AA+.

 

Might San Bernardino’s Exit from Municipal Bankruptcy Offer Lessons for Puerto Rico?

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eBlog, 4/29/16

In this morning’s eBlog, we consider the nearing end game of the longest municipal bankruptcy in U.S. history—with U.S. Bankruptcy Judge Meredith Jury noting the end is “in view.” We note, moreover, especially in view of the looming issues in Puerto Rico, the resolution emerging in San Bernardino as between the city’s retires and municipal creditors, and the resilience of the city despite these unprecedented fiscal challenges and still unsettled from its terrorism attack to persevere.

Emerging from the Longest Municipal Bankruptcy in American HistoryU.S. Bankruptcy Judge Meredith Jury Wednesday said San Bernardino’s exit from municipal bankruptcy is “in view,” at what was expected to be one of the final federal court hearings before the confirmation process begins. Judge Jury set a hearing for June 16th to discuss the third version of its disclosure statement, which she said will probably be noncontroversial — in no small part because nearly all the city’s creditors have already agreed to support it. At that hearing, Judge Jury said she would probably set a date about three months after that for the final stage of the city’s chapter 9 municipal bankruptcy—the longest process of any American city. In setting the date for the hearing, Judge Jury noted: “I appreciate all the progress the city has made. This case has gone at the speed it has to go. Now we have confirmation in view, and we’ll get there when we are supposed to get there. We are not Detroit; we are not Stockton; we came into this case in a very different posture, and therefore, the fact that it took much longer to get to confirmation was to be expected.”

Judge Jury added that only a few changes will be needed to the version of the plan of debt adjustment the city filed last month, noting San Bernardino will have to clarify how it will handle lawsuits of more than $1 million filed against it — personal injury claims and civil rights lawsuits, including the families of individuals killed by police officers prior to the chapter 9 municipal bankruptcy filing, as well as to resolve a number of issues with a committee representing retirees, leading City Attorney Gary Saenz to note San Bernardino could exit municipal bankruptcy by the end of the year.

Judge Jury has set a hearing 45 days ahead—a hearing which she said could serve as be the tentative confirmation hearing, albeit noting: “I don’t want to say for sure at this point that it is the ‘tentative confirmation hearing,’ because there are still a few issues to be resolved, but it seems like most of the larger issues have already been settled.” San Bernardino has reached agreements with all of its major creditors, which include its retirees, CalPERS, and its police and fire unions—with the final major settlement agreement reached with its pension obligation bondholders a month ago. The confirmation hearing, Mr. Saenz confirmed, was set for mid-September, after which, he noted, would come the confirmation effective date: “That could get us out of bankruptcy by the end of the calendar year.”

Counselor Saenz noted his appreciation of Judge Jury’s comments with regard to the long duration of the city’s case, because there had been so many comments made about how much longer it had taken San Bernardino than any other municipal bankruptcy in American history—it will surpass four years at the end of July. Mr. Saenz added that the reason it took longer is that the city worked to reach settlement agreements with all of the creditors, rather than springing cram-downs at the end: “We wanted to reach settlements ahead of time, rather than have long evidentiary hearings…I believe it was more cost-effective this way,” adding that negotiating agreements that both sides could agree to helped bring certainty for both sides, rather than rolling the dice on what the federal judge might decide.

In terms of the agreement with the city’s municipal bondholders, Mr. Saenz said San Bernardino was able to give its bondholders 40 cents on the dollar of what the city had been obligated to pay—as opposed to the 1% it had originally proposed, because the agreement will permit the city to stretch out payments over two decades: San Bernardino has drafted a 20-year business plan after determining it would be able to feasibly make those payments without the city ending up in municipal bankruptcy again down the road—leading him to note: “One [consideration] Judge Jury will look at is the feasibility of the confirmation plan…We believe we found a model that is dependable.” The pension obligation bond agreement continues a trend of a municipality’s bondholders faring worse than its retirees in municipal bankruptcy resolutions: under the plan of adjustment COMMERZBANK Finance & Covered Bond S.A., formerly Erste Europäische Pfandbrief-Und Kommunalkreditbank AG, and municipal bond insurer Ambac Assurance Corporation, agreed to drop their opposition to San Bernardino’s plan of debt adjustment—under which holders of $50 million in pension obligation bonds will receive payments equal to 40% of their debt on a present value basis, discounted using the existing coupon rate, according to city officials.

The timing of the nearing resolution came against a backdrop yesterday of the arrest of three relatives of San Bernardino terrorist Syed Rizwan Farook—the three were charged yesterday in an alleged marriage-fraud scheme that was uncovered in the wake of December’s attack on a gathering of county employees—making clear the extraordinary situation for a municipality in bankruptcy—and the importance of chapter 9 in ensuring a municipality is able to provide essential, life-saving public services whilst in bankruptcy. The Islamic State had reported in a broadcast on al-Bayan Radio last December that the two main suspects in the San Bernardino shootings were “supporters” of their organization and called them martyrs.

In Like Flint? The U.S. Senate Environment and Public Works Committee yesterday approved (19-1) a $220 million assistance package for Flint—a key aid as the city struggles to address its unsafe, lead-tainted drinking water crisis and consequent apprehension about the impact of lead fear depreciating its assessed property values and, ergo, its property tax revenues vital to the city and its public schools. The bill would authorize $100 million in grants and loans to replace lead-contaminated pipes in Flint and other cities with lead emergencies, as well as $70 million toward loans to improve water infrastructure across the nation; it also would authorize $50 million to bolster lead-prevention programs and improve children’s health nationwide. It authorizes $300 million over five years to remove lead pipes from houses, schools and day care centers nationwide. In addition, it would mandate that EPA warn the public about high lead levels in drinking water if a state or locality fails to do so. The House has passed similar legislation. Chairman James Inhofe (R-Okla.) stated the measure builds on a similar 2014 law and would provide “needed investments in America’s infrastructure to support our communities and expand our economy.” Currently, nearly 1,500 water systems serving 3.3 million Americans have exceeded the EPA’s lead cap of 15 ppb at least once in the past three years. Indeed, if the state of Michigan’s newly proposed standard of 10 ppb were applied across the nation, that number would jump five-fold to more than 2,500 systems with 18.3 million customers according to the Associated Press’s analysis of federal data.

“If you were going to put something in a population to keep them down for generations to come, it would be lead.”

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February 1, 2016. Share on Twitter

Flint’s Future. “If you were going to put something in a population to keep them down for generations to come, it would be lead,” Dr. Mona Hanna-Attisha, MD, MPH program director for the pediatric residency at the Hurley Children’s Hospital at the Hurley Medical Center in Flint, Michigan warned, as the complex fiscal and human challenge confronting the city’s future—and the relative responsibilities of the federal and state governments are being debated. Dr. Hanna-Attisha is developing a new database of children under 6 who may have been exposed to lead in Flint’s water, a group she said she believed could number 8,000—in effect the guts of a tale about the failure of Michigan and the federal government to promptly address the crisis after it began nearly two years ago—a fateful delay, because of the threat that the youngest children in this city may have suffered irreversible damage to their developing brains and nervous systems from exposure to lead in their drinking water. According to the U.S. Public Health Service, 26 water samples, out of nearly 4,000 collected, contained lead at levels higher than 150 parts per billion—ten times higher than federally recommended limits.

A report four years ago by the Centers for Disease Control (“Low Level Lead Exposure Harms Children: A Renewed Call for Primary Prevention Report of the Advisory Committee on Childhood Lead Poisoning Prevention”) found that exposure to even low levels of lead can profoundly affect children’s growth, behavior, and intelligence over time: combined state, local, and federal failures might well now have so tainted and imperiled the city’s fiscal and human future, because studies have linked elevated lead levels in blood to learning disabilities, problems with attention and fine motor coordination, and even violent behavior—with younger children and fetuses the most vulnerable. To date, Gov. Rick Snyder and the Michigan legislature have appropriated $28 million in emergency appropriations for the city—funds to provide initial services, such as health assessments and home visits from nurses.

State testing of four water samples from three Flint schools last year found lead levels significantly exceeding federal drinking water safety standards in what should have been a federal-state wake-up call: Flint Community Schools Superintendent Bilal Tawwab notes that no one can accurately report how many of the city’s children have been affected at this point, but he notes: “we can’t write off a generation of kids.” If anything, children in Flint are likely more dependent on the city’s schools for water and public health than most cities: more than 80 percent of Flint’s school children qualify for free or reduced meals.

Re-Balancing Motor City Taxes. Detroit Mayor Mike Duggan is set this afternoon to announce details of the city’s annual proposed property assessment changes: the good news for most owners is that most can anticipate a reduction in assessments for nearly all city residential property owners. In addition, joined by Detroit’s CFO John Hill, chief assessor Gary Evanko and a Detroit City Council representative, Mayor Duggan will also discuss how property owners can challenge her or his proposed assessments. Today’s announcement will mark the second consecutive year Mayor Duggan has proposed reducing property assessments—reductions which, in total, are projected to save Detroit’s property owners some $10-$15 million—and begin to address a gap we had noted in our MacArthur report with regard to the significant discrepancies between assessments and actual property values—over assessments by an average of 65 percent, according to a review of state tax appeals—so high that the administrative court reduced Detroit property values at a far higher rate than neighboring communities and nearly 50 percent more than the surrounding Wayne County average. The Mayor’s proposal is consistent with recommendations from a report last year by the Lincoln Institute of Land Policy which had recommended reductions in the city’s property tax rates–the highest of any major U.S. city and more than double the average rate for neighboring cities (the home-owners rate is 69 mills, or $69 for every $1,000 of assessed value).

San Bernardino Election Day. You might be glued on elections tonight in Iowa, but there is an important election tomorrow in the bankrupt city of San Bernardino, where two seats on the City Council—that is enough seats to change the balance of political power in a municipal government in bankruptcy—at a time when critical political decisions will have to be made if the city is to finalize its plan of debt adjustment and obtain U.S. Bankruptcy Judge Meredith Jury’s green light to exit bankruptcy. The election comes because no candidate received more than the requisite 50 percent threshold in the race for the 6th Ward or 7th Wards last November—effectively leading to tomorrow’s Ground Hog Day runoff, where, to fill a vacancy in the 6th Ward, Bessine Littlefield Richard is running against Roxanne Williams. Ms. Littlefield Richard is a supervisor at San Bernardino County’s Workforce Development Department at the America’s Job Center training facility; Ms. Williams works in the central office of the San Bernardino Unified School District. In the 7th Ward, representing parts of the northern and central portions of the city, incumbent Councilman Jim Mulvihill will be challenged by businessman Scott Beard. Councilman Mulvihill is an urban planning professor at Cal State San Bernardino who was first elected in the 2013 recall election—a recall largely financed by Mr. Beard, the president of Rialto-based Gerald W. Beard Realty Inc.

Ms. Williams, who would be a newcomer to elected office, frames the race as her experience and specificity against what she has described as Ms. Littlefield Richard’s less-formed plans, noting that she has—on her website—a plan for the first 100 days and beyond, a plan which she unsurprisingly notes begins with public safety—especially in the wake of the events last December: she is proposing an increase in police and police patrols—and body cameras. For her part, challenger Littlefield Richard has also stressed public safety in her campaign—a campaign in which she has been endorsed by the unions representing police and firefighters, as well as by her predecessor and the two candidates she and Ms. Williams trounced in the November primary. Ms. Littlefield Richard has repeatedly emphasized her lifelong residence on the Westside and contrasted that with Ms. Williams, who moved to the 6th Ward shortly before the election—after running for the 3rd Ward City Council seat in 2013. Despite running to serve in the city now in municipal bankruptcy longer than any other city, neither runoff candidate appears to have devoted much time or focus on the city’s fiscal future.

Restructuring Puerto Rico’s Debts. The Puerto Rico government moved at the end of last week to try to restructure some $70 billion of public bonds: the U.S. territory offered a voluntary debt exchange to bondholders last Friday in a meeting in New York City, following up on what Government Development Bank President Melba Acosta Febo had said in December when he committed that Puerto Rico would propose a restructuring of its debt to its creditors before the end of January—leading to Puerto Rico Gov. Alejandro García Padilla’s confirmation last Thursday night that his government would propose a debt exchange on Friday to its creditors in a closed door meeting. The Wall Street Journal reported that Puerto Rico was seeking to exchange its debt for two new types of securities: one in which all interest and principal payments would be suspended for five years, at the end of which interest would rev up to 5% in 2021; in the other, payments would commence in 2021, but would be dependent on government revenues doing better than current projections. In the second security type, the island’s bondholders would receive up to 25% annually of revenues that exceed current projections. All municipal bondholders would receive both forms of bonds, with the value of the second type equal to the amount of impairment on the first type, and, according to local press reports, haircuts for Puerto Rico’s municipal bondholders would depend on what type of bond they held: those with general obligation bonds would experience smaller haircuts than those holding other sorts of municipal bonds: their bonds would be less impaired. The payments would come from a wide variety of revenue sources pooled together to enable payments of about $3 billion a year in interest and principal starting in 2018, according to El Vocero. The proposal, however, has yet to weather Puerto Rico’s legislature, according to the island’s House of Representatives President or the Chair of the Treasury and Finance Committee Rafael “Tatito” Hernández Montañez: Chair Montañez wryly noted: “The devil is in the details,” adding he was unfamiliar with the proposal Puerto Rico made to creditors in New York City.

The Twin Challenges of Terrorism & Municipal Bankruptcy

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December 22, 2015. Share on Twitter

Readying to Recover from Terrorism and Municipal Bankruptcy. The San Bernardino City Council yesterday unanimously chose the current Burbank, California City Manager, Mark Scott, to be the new city manager—with San Bernardino Police Chief Jarrod Burguan to serve in the interim effective January 1st—the date on which current Manager Allen Parker’s resignation (by mutual negotiation) becomes effective. Under the apparent agreement, according to Chief Deputy City Attorney Jolena Grider, Mr. Scott has signed a one-year contract, for $248,000, with a 30-day notice to terminate, about a seven percent increase over the current salary, but a significant reduction from the salary he had been receiving at the time he offered his resignation last month. In accepting the offer, Mr. Scott told the San Bernardino Sun he had expressed interest in the San Bernardino city manager position just a few days prior to the Dec. 2nd terrorism attack and that he had experienced the city’s heart since then: “I’m at the point in my career where I’m looking to join a high-functioning team…and I believe you’ve got many people here — including yourselves (elected officials), including people in the audience — who are capable of fulfilling the promise.” Mr. Scott will continue in Burbank until the first week of February, but he intends to try to devote a significant amount of time in San Bernardino in the interim. Councilman John Valdivia proposed removing housing assistance from Scott’s compensation. But when City Attorney Gary Saenz said it would be helpful to keep it — given that relocation for a year can be expensive, and it’s good to have a city manager who lives in the city — and no other council members supported the idea, Valdivia joined the unanimous vote.

Meanwhile, Chief Burguan, who has been widely praised for his leadership in response to the terrorist attack in the city—but who has led a department with significant challenges, was approved without discussion, notwithstanding concerns several Council Members had earlier expressed when his role as interim city manager was first proposed. There was, however, no public discussion yesterday before he was approved unanimously, for a salary of $19,104.88 per month, not quite $1,000 more than he now makes as police chief.

The attacks in San Bernardino at the Inland Regional Center affected not just the city, but also other responding governments. Yesterday, each ratified emergency proclamations, a key step to ensure their eligibility to seek state and federal funding to recover expenses. The costs for San Bernardino already are nearing $1 million. The unanimous votes yesterday came in the wake of each jurisdiction’s unanimous proclamation last by executives designated as director of emergency services: San Bernardino Mayor Carey Davis, Redlands City Manager N. Enrique Martinez, and San Bernardino County CEO Greg Devereaux. The San Bernardino City Council voted unanimously yesterday to ask the state for financial help. Despite San Bernardino’s municipal bankruptcy, outgoing City Manager Allen Parker reported the city’s budget could accommodate overtime and other costs created by the attack. Mr. Parker referenced unanticipated savings from spending less than expected on salaries, because the municipality had prepared and adopted its budget with the expectation that 5 percent of positions would be vacant. Instead, approximately 15 percent of positions are vacant. What remains unclear, in the wake of the tragedy, is how the mass shootings might impact assessed residential and business property values.

Rocky Start & Juggling Diverse Claims. Mr. Scott will have homework aplenty to prepare for his new position and responsibilities—not just to help San Bernardino try to recover from the terrorist attack and the attack’s potential fiscal impact via fear and intimidation to undercut the city’s economy, but also from parallel attacks from the city’s municipal bondholders and insurers—who, in challenging San Bernardino’s most recent financial disclosures in U.S. Bankruptcy Judge Meredith Jury’s court have written about what they assert constitute a lack of coherent financial disclosure, with Ambac Assurance Corp. attorney Thomas Keller writing: “(San Bernardino’s) revised disclosure statement still falls woefully short of containing the ‘adequate information’ to which creditors are entitled before being asked to vote on the revised plan [of debt adjustment],” in the firm’s filing in preparation for a status hearing Judge Jury has scheduled for tomorrow—a hearing at a time when the city, unsurprisingly, is not just transfixed by the terrible terrorist shootings, but also in a governance flux: it is most difficult to imagine that Chief Burguan, in addition to the awful responsibilities and burdens he carries in the wake of the shootings, but now also with being the interim manager, will be able to devote to these claims.

Indeed, the city two weeks ago, declared a state of emergency: it is seeking reimbursement from the federal government for costs associated with the attack. It is difficult to imagine the fiscal and time and attention juggling sought by some of the city’s creditors—in this instance Ambac and Erste Europäische Pfandbrief-und Kommunalkreditbank AG (EEPK), the former being the municipal bond insurer of some $50 million in pension obligation bonds held by EEPK—whose attorneys each filed further objections to San Bernardino’s financial disclosures in response to the amended disclosure statement San Bernardino November 25th—just one week before the terrorist attack in San Bernardino. In their claim, the creditors asked challenged the city’s proposed “draconian” plan to pay only paying 1 percent of its owed promises on its pension obligation bonds and general unsecured claims—especially when the city’s financial disclosures are so “murky,” adding that, in its filing, San Bernardino had failed to explain an additional $200 million in expenses and reserves mentioned in supplemental filings—new provisions, including a $24 million bankruptcy reserve fund, an additional $14 million for police fleet replacement, and $159 million for the “police services master plan.” Notwithstanding what one of the challengers claimed to be the “enormous size” of these new spending and reserve items, he said the amended disclosure statement only provides partial or cursory explanations: “The enormous size of these changes calls into question the validity of the city’s financial projection methodology, and certainly warrant clear disclosure in the body of the amended disclosure statement and significant analysis and explanation by the city.” Under San Bernardino’s proposed plan, holders of $50 million of unsecured pension obligation bonds would receive payments of $655,000 plus interest over time; holders of general unsecured claims between $130 million and $150 million would receive a pro rata share of about one percent—or $1.3 million after the plan became effective, according to the city’s filing—with the plan before Judge Jury noting: “The city believes that the plan provides the greatest and earliest possible recoveries to holders of claims while preserving necessary city services and operations.” One struggles to imagine the task confronting Judge Jury: already charged with the responsibility to weigh whether San Bernardino has put together a plan of debt adjustment which, if approved, would provide for fiscal sustainability, she too has to be keenly aware that the terrorist attack has imposed a whole different and unique set of creditors for whom the city will have to bear responsibility.

Waiting for Godot. Standard & Poor’s retained Atlantic City on credit watch negative, pending, the credit rating agency reported, a long-awaited resolution of Gov. and still-Presidential contender Chris Christie’s conditional vetoes of a rescue package for Atlantic City approved by the legislature last June. Gov. Christie announced nearly six weeks ago that he wanted changes to bills that would have established a payments-in-lieu of taxes program for casinos over a 15-year period and reallocated New Jersey’s casino alternative tax to pay debt service on Atlantic City-issued municipal bonds; yet he has not acted. Thus, even in the wake of the rating agency’s knocking Atlantic City’s credit rating more than three months’ ago because of uncertainty over whether it could meet its near-term fiscal obligations, the Governor has yet to provide any clarity to his intentions, thereby risking exacerbating the city’s fiscal plight. In their report, S&P analysts Timothy Little and Lisa R. Schroeer wrote that, in their view, Gov. Christie and the legislature have until the end of the current legislative session to resolve Gov. Christie’s conditional vetoes and to release a long-term plan for the South Jersey city—a city still in the awkward situation of having an elected Mayor, but also a state-appointed emergency manager (Gov. Christie appointed corporate restructuring attorney Kevin Lavin as Atlantic City’s emergency manager last January. Mr. Lavin, however, has not released any new updates since a March 23rd report in which he urged “shared sacrifice” among stakeholders, including the possibility of extending maturities for bondholders.) In its newest report, the S&P dynamic duo wrote: “Atlantic City’s ability to address its structural imbalance and long-term liabilities has been a significant concern that weighs on its fiscal future…The decision to conditionally veto several bills intended to stabilize the city’s revenues continues to leave the city’s finances in a vulnerable and tenuous position.” Atlantic City faced a $101 million budget gap before adopting a 2015 fiscal plan in late September which relied partly on anticipated revenues of $33.5 million in redirected casino taxes included in the rescue package.

4th Down Congressional Punt. Who could possibly forget the great strip by cartoonist Charles M. Schulz of Lucy’s repeated promises she would not swipe the ball before Charlie tried to kick it? So too Congress appeared to be poised to not bail out Puerto Rico, but rather to provide the territory with options, such as those available to General Motors, Chrysler, Detroit—or any other U.S. corporation, to file for federal bankruptcy—options which would have imposed no costs on the federal budget, but would have, potentially, affected large campaign contributions. Instead Congress bailed out of Washington without taking any action to ensure or provide Puerto Rico with any fiscal tools or authority to address its onrushing insolvency, rejecting various proposals offered by Democrats which would have granted some form of municipal bankruptcy authority to the U.S. territory. The $1.1 trillion omnibus appropriations bill Congress passed and the president signed only included two smaller provisions related to Medicare funding in Puerto Rico, as well as a provision allowing the Treasury Department to use some of its budget to give technical assistance to the Puerto Rico government. Puerto Rico Gov. Alejandro García Padilla said: “Once again Wall Street has demonstrated its control over Congress; Wall Street rules Congress…That power is clearly factored into the fundamental analysis of hedge funds and vulture funds that control our democracy.” In fact, chapter 9 municipal bankruptcy negotiations between Democrats and Republicans to include provisions, such as extending Chapter 9 municipal bankruptcy to the commonwealth’s public authorities, continued until the final votes—with Republicans, in both houses, Senate Judiciary Committee Chair Charles Grassley (R-Iowa) leading uniform opposition to authorizing the U.S. territory access to municipal bankruptcy—especially in the face of a torrent of opposition from wealthy, donor hedge funds. Chair Grassley claimed the U.S. territory’s problems were too complex to be fixed solely through restructuring; yet, he offered no alternative.

Promises, Promises. While Congress scurried out of town without offering any avenues for either the Commonwealth of Puerto Rico or its fiscally struggling municipalities, new House Speaker Paul Ryan (R-Wis.), prior to departing, said he was instructing all House committees which have jurisdiction over Puerto Rico to work with Commonwealth leaders to come up with what he termed a “responsible solution” to the fiscal and debt crises by the end of March. In addition, Speaker Ryan promised to hold a hearing on Puerto Rico on Jan. 5, according to House Minority Leader Nancy Pelosi (D-Ca.), noting: “While we could not agree to include precedent-setting changes to bankruptcy law in this omnibus spending bill, I understand that many members on both sides of the aisle remain committed to addressing the challenges facing the territory.”

You made me promises, promise
Knowing I’d believe
Promises, promises
You knew you’d never keep

During the last minute negotiations in the House, Minority Leader Pelosi introduced legislation to provide a short-term stay of legal actions by certain creditors while Congress considered debt restructuring legislation: Leader Pelosi sought a moratorium on legal action which would last until March 31st—in order to ensure sufficient time to comply with Speaker Ryan’s proposed and promised timeline. Rep. Pelosi, however, was unable to gain the requisite unanimous consent.

When the second session reconvenes next month, it, thus, remains unclear what steps Congress might take—or how any steps might come prior to either a default by Puerto Rico, or legal actions taken by some of the island’s creditors. In the Senate, Chairman Grassley, Finance Committee Chair Orrin Hatch (R-Utah), and Natural Resources Committee Chair Lisa Murkowski (R-Alaska) have proposed legislation to create a financial oversight authority for the Commonwealth, similar to means used to prevent defaults in New York City and Washington, D.C., and which would authorize authority to borrow, as well as make $3 billion of unallocated Affordable Care Act funding available to help Puerto Rico stabilize its budget and debt in the short-term. In the House, fellow Badger of Speaker Ryan Rep. Sean Duffy (R-Wis.) has proposed legislation to provide public authorities in Puerto Rico with Chapter 9 municipal bankruptcy protection in exchange for the Commonwealth’s acceptance of oversight from a Presidentially-appointed five-member Financial Stability Council. The disappearance of Congress and repudiation of any fiscal responsibility in the meantime appears likely to force Puerto Rico Governor García Padilla to call for a special session of the Puerto Rico legislature to meet before its currently scheduled next meeting on Jan. 11th.

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.