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.”

February 18, 2016. Share on Twitter

Schooling on Municipal Bankruptcy. Michigan House Speaker Kevin Cotter (R-Mt. Pleasant) yesterday told his colleagues that a municipal bankruptcy reorganization of Detroit Public Schools (DPS) “must remain on the table” if lawmakers are unwilling to impose “serious academic and financial reforms” on the troubled school district, noting that a state Senate plan to codify Gov. Rick Snyder’s $715 million request to help DPS escape crippling debt and funnel more money into classrooms is inadequate to address systemic issues in the district, adding: “I am interested, and my caucus is interested, in being problem solvers…But we’re not going to be problem enablers. Just simply cutting a check for $715 million and returning control, I believe, is only enabling the problem.” The Speaker’s statements came as Michigan House Republicans this week introduced a new Detroit school plan—a proposed plan which would implement various academic reforms in the district, including an A-F grading system for individual schools and a third-grade reading initiative that would require the district to hold back struggling students—a plan which, nevertheless, immediately drew ridicule from both Detroit Democrats and unions. The proposal would also limit collective bargaining rights for district employees, penalize teachers who participate in “sickouts,” and put new teachers into a 401(k)-style retirement plan. The proposed plan also seeks school board elections next November—a contrast to Detroit Mayor Mike Duggan’s plan, which seeks an even faster transition, while the pending plan in the Michigan House would not restore a fully elected school board for at least eight years. Nevertheless, the legislative task of reconfiguring Detroit’s fiscally and physically failing schools is encountering its own obstacles in the state legislature, with Senate Majority Leader Arlan Meekhof (R-West Olive) yesterday noting that the House package is unlikely to help ongoing negotiations in the Senate, where majority Republicans are trying to win over reluctant Democrats, especially members from Detroit. Sen. Goeff Hansen (R-Hart) is sponsoring legislation to create a new debt-free Detroit school district—telling his colleagues yesterday that he is focused on getting bills passed that fix the school district’s finances before tackling academic reforms.

The more than academic problem is the clock, which is ticking towards a municipal bankruptcy of DPS as early as April Fool’s Day. Indeed, yesterday, retired U.S. Bankruptcy Judge Steven Rhodes, who presided over Detroit’s chapter 9 municipal bankruptcy trial and has been serving as a special advisor to Governor Snyder on DPS’s looming insolvency, has warned lawmakers against allowing the district to go through a Chapter 9 reorganization. The Michigan Treasury Department has estimated a Detroit school district bankruptcy could leave the state on the hook for at least $1.5 billion of debt the district owes creditors, including the state’s own school employee pension fund.

With just weeks to reach consensus, the Speaker yesterday warned that Democrats in both chambers had spoken out against the Senate bills last month upon introduction, warning: “That tells me there probably isn’t a sweet spot in this one for a bipartisan plan…“I haven’t closed the door to it, but for Republican support, there are going to have to be some pretty serious reforms.” Speaker Cotter yesterday acknowledged that a DPS municipal bankruptcy would trigger significant state fiscal costs—more than a bailout, but he noted he was unwilling to put $715 million of additional taxpayer money into what he called a failed system: “To the extent that people want to hold out just for money and the return of control, I am perfectly comfortable keeping the option of bankruptcy on the table.”

Spinning the Debt Wheel in Atlantic City: “The city’s fiscal crisis is severe and immediate.” A new Atlantic City rescue bill, the “Municipal Stabilization and Recovery Act,” would give the State of New Jersey increased authority over Atlantic City’s finances as part of an effort to avoid the city going into chapter 9 municipal bankruptcy: the proposed legislation would empower the state to renegotiate Atlantic City’s outstanding debt and municipal contracts for up to five years—with a goal of allowing Atlantic City to regain access to the municipal bond market while, at the same time, achieving cost savings through reorganized government operations, consolidating agencies and engaging in shared services. Under the proposal, the state would also have authority to leverage city assets to gain needed revenue—or, as State Senate President Steve Sweeney (D-Gloucester), who introduced the bill with Senators Kevin O’Toole (D-Wayne), and Paul Sarlo (D-Wood-Ridge) put it: “The intervention plan will enable the state and the city to work together to accomplish what Atlantic City can’t do on its own: “The city’s fiscal crisis is severe and immediate.” Under the proposed legislation, Atlantic City would have one year to find a way to monetize its water authority before the state could act to use the assets to generate needed funds; Atlantic City would retain its decision-making authority unless New Jersey’s Local Finance Board acted to take control. The increasing urgency—as in Michigan—comes in recognition that Atlantic City is at fiscal risk of insolvency by early April absent state assistance, according to a Jan. 21 report from former emergency manager Kevin Lavin: Atlantic City is behind on a payment it owes the Borgata casino on $170 million in tax appeals and missed a $62.5 million payment it owed last month. As Sen. Sarlo warned last month: “If the city is allowed to go into bankruptcy, all the decisions would be imposed by a [federal] bankruptcy judge…This plan gives the city and the state a voice and a role in making the decisions that will impact the lives of the residents and the future of Atlantic City. This is a far better process than [chapter 9 municipal] bankruptcy.” A companion bill was also introduced that would enable casinos to make payment in lieu of taxes payments in an effort to end costly tax appeals. Gov. Chris Christie had rejected a financial relief package last month that would have enabled Atlantic City’s eight remaining casinos to enter into a PILOT (payment in lieu of taxes) program for 15 years and aggregately pay $120 million annually in that period instead of a traditional property tax. The amended bill shortens the PILOT period from 15 years to 10 and also would require casinos make additional payments based on their share of total gaming revenue that would be used for paying down the city’s more than $400 million in outstanding debt.

Saving Puerto Rico. Puerto Rico Tuesday released a draft version of its FY2014 CAFR as part of an effort to enhance Congressional support to help the U.S. territory avert insolvency as early as the end of next month—and in response to repeated calls by members of U.S. House and Senate, as Congress, under pressure from House Speaker Paul Ryan (R-Wi.) is pressing for some legislative resolution by then. Puerto Rico Gov. Alejandro García Padilla yesterday noted that with the release, Congress has sufficient fiscal data, adding that “The Commonwealth has provided an unprecedented amount of reliable and up-to-date financial information regarding the depth and imminent nature of Puerto Rico’s debt crisis.” Nevertheless, a representative of KPMG said Puerto Rico’s audited CAFR was still six to seven weeks away. Swift action in providing the data matters: Senate Finance Committee Chair Orrin Hatch (R-Utah) noted: “It’s been a real challenge to obtain verifiable financial information from Puerto Rico…The territory has taken positive steps forward…I plan to review the unaudited statements in their entirety, but I also hope the government of Puerto Rico fulfills my request for detailed audited financial statements as well as information regarding the territory’s public pension plans and other budgeting issues. As any entity that borrows with federal tax preference understands, unaudited statements or reports from groups hired by the government, complete with disclaimers against assured accuracy, are no substitute for audited, verifiable information.” In presenting the draft CAFR, Gov. Padilla said, “the Commonwealth has reiterated the critical need for Congress to provide Puerto Rico with a broad restructuring framework to address its unsustainable debt burden. The risk of Congress not providing such framework – which costs nothing to U.S. taxpayers – is condemning Puerto Rico to a legal morass that will jeopardize essential services for U.S. citizens living in Puerto Rico, further accelerate out-migration to the U.S. mainland and severely impair creditors’ ability to recover on their claims.” The draft CAFR demonstrates a widening in the island’s net deficit position of the commonwealth’s “primary government” to $49.2 billion as of June 30, 2014 from $46.7 billion a year earlier. Its “governmental activities” net deficit position widened to $50 billion from $47.5 billion in the same period—or, as Puerto Rico Treasury Secretary Juan Zaragoza, in a statement accompanying the draft CAFR put it: “The Commonwealth currently faces a severe fiscal and liquidity crisis, the culmination of many years of significant governmental deficits, a prolonged economic recession (which commenced in 2006), high unemployment, population decline, and high levels of debt and pension obligations…If management is unable to complete [a debt] restructuring by the end of FY2016, or to otherwise obtain additional funding or other arrangements with its creditors, the commonwealth’s management expects that the commonwealth and various instrumentalities will be unable to comply with their scheduled debt obligations.”

The Downhill View of Municipal Bankruptcy from Hillview. Meanwhile, farther north in the little municipality (population under 9,000) of Hillview, Kentucky, a suburb of Louisville, and Truck America—under orders from U.S. Bankruptcy Judge Alan C. Stout—have agreed to participate in federally court-ordered mediation talks on Monday, albeit some portions of the process will be kept secret; they are also under orders from Judge Stout to produce a mediation statement in advance of the talks which will include each party’s position and may include settlement information that is inadmissible in court, according to bankruptcy attorney John Whitlock, with Locke Lord LLP. Hillview is the first municipality in Kentucky ever to file for chapter 9 municipal bankruptcy; the city filed its petition last August, claiming it was intended to halt the 12% interest compounding annually on an $11.4 million breach of contract judgment it owed to Truck America. (By the time the city filed, the award had grown to $14.7 million.) However, Truck America said in a letter to the U.S. Bankruptcy Court last month that the correct amount is in excess of $15.23 million due to a computational error in calculating the interest. In addition to its largest creditor, the city also owes a combined $2.02 million on a pool bond issued by the Kentucky Bond Corp., and on outstanding municipal general obligation bonds that officials have said they do not intend to restructure. An evidentiary hearing was held last month to determine if Hillview is even eligible or qualified to pursue its chapter 9 municipal bankruptcy: a ruling is pending.

The federal orders come in the wake of earlier failed settlement negotiations: the mediation statement is to incorporate the municipality’s and Truck America’s, and may include settlement information not admissible in federal court, according to bankruptcy attorney John Whitlock: that is, under prodding from Judge Stout, this is stout reinforcement of his efforts to avoid the significant costs that a chapter 9 bankruptcy trial in his courtroom could engender—especially in a case where there appears to be significant doubt with regard to the municipality’s eligibility—a legal determination yet to be resolved. Hillview and Truck America, Hillview’s largest creditor, participated in settlement discussions earlier this year while the city waited for Judge Stout to stoutly rule on whether it qualifies to continue with its municipal bankruptcy case; Truck America rejected a settlement offer made by Hillview and issued a counteroffer last month. The Hillview City Council held a special meeting two weeks ago and approved an offer to accept a $5 million loan from the Kentucky League of Cities as part of its most recent settlement offer, according to the Pioneer News. In addition, the News reported Hillview has agreed to pay Truck America at least $100,000 annually over five years, plus “any carryover funds at the end of the fiscal year.” Hillview also owes a combined $2.02 million on a pool bond issued by the Kentucky Bond Corp., and on outstanding general obligation bonds that officials have said they do not intend to restructure. An evidentiary hearing was held Dec. 9 and Dec. 10 with regard to whether Hillview is qualified to pursue its Chapter 9 bankruptcy case, and objections filed by Truck America. A ruling is pending.

Governance in BankruptcyEven though major municipal bankruptcy filings experienced a pause last year, the extraordinary Boston Federal Reserve study on long-term municipal fiscal sustainability and the reporting on the current apprehensions with regard to Chicago, the Detroit Public Schools, and Puerto Rico appears to have, as our admired friends at MMA describe it, caused “municipal investors to worry more about state and local governments’ long-term fiscal condition (and whether or not defaults and bankruptcies will become more common).” This seems to be imposing greater stress on municipal leaders: how does Atlantic City or the Detroit Public School System, or Flint, Michigan provide for fundamental public services and capital borrowing in a system with ever increasing fiscal disparities? MMA described the nub of the issue: “[T]he security pledges on which our market is based are appearing increasingly brittle.” With federal–and, increasingly, state elimination of revenue sharing, we are noting ever increasing disparities in income between jurisdictions. Unsurprisingly, the Flints and Fergusons of the nation are experiencing disproportionate levels of poverty and fiscal stress–even as federal and state investment is declining–meaning that their respective costs of debt and investment are disproportionately greater–even as they have less and less access to low cost, long-term infrastructure financing. MMA notes that the current response seems to have been to reinforce existing security pledges with benefits such as statutory liens, special revenue status, and other legal protections. But these run the risk of being more like a band aid than a resolution–and, as MMA insightfully notes: these types of responses ensure neither:

  • full payment of principal and interest; nor
  • that politics, public policy considerations, or inequitable adjustments will not influence outcomes in a distressed situation.

MMA points to the outcomes in Jefferson County, Detroit, as well as in the proposals for Puerto Rico’s restructuring, putting it this way: “In other words, investors cannot afford to trade away material credit fundamentals for purely structural enhancements, in particular for GO and tax-backed securities. The power of the statutory lien for GO bonds: The presence of a statutory lien means that, in a chapter 9, bondholders are secured by a lien that is itself preserved, bolstering ultimate recovery. As a result, they are more likely to be unimpaired than unsecured creditors to the extent that tax revenues are sufficient to make payment on the debt.” 

The Daunting Fiscal Challenges of Smaller, Poorer Municipalities

February 10, 2016. Share on Twitter

In this morning’s  blog post, we consider the growing fiscal and governing challenges of smaller cities with disproportionate lower income populations: here, Flint, Michigan, and Ferguson, Missouri–both smaller cities struggling with disproportionate levels of poverty. But there, as Robert Frost would have noted, their paths diverge. Because the fiscal disaster and human crisis from the lead poisoning for Flint’s children emerged from neglect and other state and federal failures–and because the crisis has put the city’s children at greatest risk–there seem to be signal federal and state efforts to make amends, including the provision of fiscal help. There is no such comparison in Ferguson, where the U.S. Justice Department yesterday filed suit against the city–a city characterized by disproportionately low incomes and race–but which has sought to fill its municipal coffers through the imposition of traffic fines levied disproportionately on those travelling into the city, rather than through more traditional and equitable means. There are two trends: the increasing fiscal disparities between municipalities in the U.S. as the concept of revenue sharing by the federal government and states has dissipated, and the growing apprehension over the cost of operating too many municipalities in metropolitan regions. 

Out Like Flint. Flint Michigan Mayor Karen Weaver has proposed a plan to replace the lead pipes in the city—pipes which have become a major health threat to the city’s future because of drinking water contamination and lead poisoning in the wake of a decision by a former gubernatorially appointed emergency manager, Darnell Earley, to begin pumping water from the Flint River to homes in what used to be one of the state’s largest cities two years ago. Her plan could be assisted by appropriations recommended this week by Gov. Rick Snyder. The hope is that replacing lead service lines would prove to be a key step to reducing the highest risk for lead to leach into the city’s drinking water—notwithstanding that there are other sources of lead in plumbing, including older soldered joints and fixtures containing leaded brass. Mayor Weaver noted: “We’ll let the investigations focus on who is to blame for Flint’s water crisis…I’m focused on solving it.” Mayor Weaver stated the $55 million project could begin by March: the goal is to replace an estimated 15,000 lead service lines within one year at no cost to homeowners: her plan is to target homes, but not schools, businesses, or other nonresidential sites—or, as she put it: “We are going to restore safe drinking water one house at a time, one child at a time until the lead pipes are gone.” The Mayor said the project would be a joint partnership between the National Guard and the city, but would require coordination with state government and funding from the Michigan Legislature.

Flint is the gritty rustbelt metropolis, where General Motors was founded in 1908, but which, since 2011, has been run by a series of state-appointed emergency managers: It has lost half its population since the 1960s, as GM cut its local workforce from 80,000 to around 5,000; fewer than 100,000 people now live there. More than 40% of the city’s mostly black population lives below the poverty line. Crime and unemployment rates are sky-high. Around 15% of Flint’s houses are abandoned. But for Flint, the stakes are higher: its tax base is most likely to erode—beginning with its property tax revenues, where as if the unacceptable levels of lead in the drinking water would not be sufficient to deter new homeowners from bolstering the city’s property tax revenues, some mortgage lenders are now warning home buyers in the city that they must prove there is no contamination at a property, or else they will not make a loan for its purchase. It is difficult to imagine a more immediate source of critical tax revenue erosion: now local real-estate agents and lenders must be apprehensive that the new limitation could be another punch in the gut of the city’s key tax revenues—revenues already on a long, downhill slide in the wake of the departure of major auto industry employers. Or, as Daniel Jacobs, an executive with Michigan Mutual, which recently issued a notice to its employees requiring that homes pass a water test before it will make a loan put it: “The tragedy in an already depressed community is now likely to see housing values plummet not only because of the hazardous water, but because folks cannot obtain financing.” Indeed, the Flint water contamination crisis and Detroit’s public school restructuring took center stage yesterday when Gov. Snyder presented his FY2017 budget—in which he told legislators he was “committed to providing critical investments needed for the Flint water crisis and Detroit Public Schools, while maintaining the long-term focus on the key priorities of education, job creation, health and human services, public safety and fiscal responsibility.” His budget seeks an additional $195 million to help restore safe drinking water to Flint—appropriations which would be in addition to the $37 million already approved from a supplemental budget action, bringing total state funding for Flint to $232 million, telling legislators the level includes the $37 million to help with water infrastructure; $15 million for food and nutrition; $63 million for the health and well-being of Flint children and other vulnerable residents; and $30 million to provide water bill payment relief for Flint. In addition, Gov. Snyder proposed that $50 million be set aside in a reserve fund for legislative oversight of the Flint programs after a six-to nine-month period, noting legislators would have the opportunity to assess where the resources could be deployed most effectively with good accountability, efficiency, and outcomes. Indeed, the proposal appears consistent with the levels Mayor Weaver reported yesterday, noting that her plan to remove and replace all lead water pipes in city homes carries a $55 million price tag. Gov. Snyder’s budget recommendation also seeks funding for statewide water infrastructure improvement. He introduced the creation of a commission to look at 21st century water infrastructure in his state of the state address earlier this year.

For a legislature already apprehensive about the distribution of annual appropriations, however, the Governor’s new requests might create some balancing issues—especially with the swelling costs for the struggling Detroit Public Schools’ (DPS) restructuring—for which the Governor is asking for $715 million from the legislature, stating yesterday: “The action plan here is to devote resources, not from the school aid fund, but instead use tobacco settlement proceeds at the rate of $72 million a year for 10 years to deal with the $515 million deficit and $200 million for additional investment.” In addition, he sought an additional $50 million to help with DPS current debt situation that, he said, is already reserved in the state’s 2016 budget supplemental. The governor is apprehensive DPS could be insolvent by this summer, urging state legislators to act swiftly, waring: “If we don’t, this is an issue that will be resolved in the court system where the outcomes can be much more devastating to the citizens of Michigan and other school districts in the state. The clock is ticking and action is required.”

Transferred Water Woes. Somehow it almost seems as if Detroit has channeled some of its fiscal woes north to Flint—yesterday Moody’s restored Detroit’s old water and sewer debt to an investment-grade rating for the first time since Detroit exiting municipal bankruptcy the city left bankruptcy a year ago last November. Ergo, yesterday, Moody’s upgraded the newly created Great Lakes Water Authority bonds—some the $5.5 billion of water and sewer revenue municipal bond debt—of the post-bankruptcy created regional authority (The water system treats water from Lake Huron, Lake St. Clair and the Detroit River and distributes treated water to a service area population of about 3.8 million. The sewer system treats and disposes of wastewater produced by a service area population of approximately 2.8 million.) to investment grade, with a stable outlook, with the rating agency recognizing that the new authority has assumed all the debt secured by the net revenues of the Detroit Water and Sewerage Department. The regional authority manages regional water and wastewater services, assets, and handles rate-setting responsibilities, even as Detroit retains control of water and sewer services within city limits. Under the terms of the lease, the regional authority has sole ownership interest in revenue generated by the combined regional and local system—or, as Moody’s observed: “This significantly limits the risk that a future bankruptcy filing by the city of Detroit or intensified fiscal pressure on the city in general would contribute to bondholder impairment with respect to the water revenue debt,” adding that the upbeat ratings also reflect the massive scale of water operations, as well as a customer base that extends beyond Detroit’ boundaries, very strong operational and fiscal management, healthy liquidity, and the expectation of stable or improved debt service coverage. Nevertheless, the ratings were tempered by what Moody’s characterized as the authority’s credit challenges, such as high leverage of pledged revenue, extensive capital needs, and labor market and demographic weaknesses. Under Detroit’s chapter 9 municipal bankruptcy plan of debt adjustment, the city had successfully sought to monetize its water and sewer assets: a key provision of the regional system’s 40-year lease with Detroit provides the Motor City will receive $50 million a year to overhaul its aging infrastructure as well as $4.5 million in assistance for low-income customers.

Recall. Michigan Governor Rick Snyder yesterday presented his budget—with the twin emergency focus on Flint and Detroit’s fiscally failing public schools even as the Michigan Board of State Canvassers three days’ ago approved a recall petition to force him out of office—with a statewide vote potentially as early as August 2nd, provided the requisite signatures are gathered by the deadline: The petition seeks the recall for moving the state School Reform Office to a department under the governor’s control; nine other petitions involving the Flint water crisis were rejected because of technical errors such as misspelled or omitted words. Almost as if Pandora’s box has been opened, Gov. Snyder is also likely to confront challenges in court: According to Great Lakes Law, lawsuits have been filed on three fronts: “class action citizen suits filed by environmental groups, class action and torts, coupled with constitutional claims against the governor, government investigations both state and federal, that may result in civil and criminal enforcement actions,” even though special legal protections make it difficult to hold governments liable for damages such as those filed by Flint residents.

The U.S. Sues Ferguson over Municipal Taxes and Charges. The U.S. Justice Department, in a lawsuit filed on Wednesday against the small city of Ferguson, Missouri, charged the municipality with regard to an effort to end an allegedly longstanding pattern of unconstitutional policing. The suit, coming in the wake of inability to reach a settlement with the city’s Mayor and Council, charges that the city’s police and court systems routinely violate the civil rights of the city’s black residents, in part to generate revenue from tickets, claiming in its suit that the city’s “routine violation of constitutional and statutory rights, based in part on prioritizing the misuse of law enforcement authority as a means to generate municipal revenue over legitimate law enforcement purposes, is ongoing and pervasive,” adding: Ferguson’s municipal code confers broad authority on the Court Clerk, including authority to collect all fines and fees, accept guilty pleas, sign and issue subpoenas, and approve bond determinations. The Court Clerk and assistant clerks routinely issue arrest warrants and perform other judicial functions without judicial supervision. As the number of charges initiated by Ferguson Police Department has increased in recent years, the size of the court’s docket has also increased. According to data the City reported to the Missouri State Courts Administrator, at the end of fiscal year 2009, the court had roughly 24,000 traffic cases and 28,000 non-traffic cases pending….In January 2013 the City Manager requested and secured City Council approval to fund additional assistant court clerk positions because “each month we are setting new all-time records in fines and forfeitures,” and the funding for the additional positions “will be more than covered by the increase in revenues.” The federal suit includes a count noting: “The City’s desire to generate revenue influences fine amounts. City officials have extolled that Ferguson’s preset fines are “at or near the top of the list” compared with other municipalities across a large number of offenses, and have cited these fine amounts—which were lowered during the pendency of the United States’ investigation—as one of several measures taken to increase court revenues. For violations that do not have preset fines, the siut noted: “Defendant has also taken measures to ensure fines are set sufficiently high for revenue purposes.”

Puerto Rico in the Twilight Zone. U.S. Senate Judiciary Committee Chairman Orrin Hatch (R-Utah) yesterday demanded Puerto Rico Gov. Alejandro Garcia Padilla provide detailed financial information by March 1st and stated he intends to come up with a plan to help the commonwealth by the end of March—relatively consistent with House Speaker Paul Ryan’s time frame, discussing his goals for a solution to Puerto Rico’s fiscal and debt crisis during a Finance Committee hearing on the President’s FY2017 budget with Treasury Secretary Jack Lew—with the Secretary making clear that any restructuring solution has to pass before Puerto Rico faces major bond payments in May and June—even as Mr. Hatch called the administration’s position an “unprecedented debt-restructuring authority” for Puerto Rico that would give “an explicit preference for public pension liabilities over debt issued by the Puerto Rican government, even though the territory’s constitution gives preference to some of [the] debt.” Chairman Hatch seems focused on requesting up-to-date details about the Territory’s three largest pension systems, stating he understands that the systems are only 4% funded and that the commonwealth-wide bankruptcy regime Treasury has floated would give preference to those unfunded liabilities.

The U.S. House Natural Resources Committee has scheduled a February 25th hearing at which Treasury Counselor Antonio Weiss has been asked to discuss an analysis of Puerto Rico, as the House presses to meet House Speaker Paul Ryan’s deadline of April 1st for the House to complete and send legislation to the Senate, with a focus on legislation authored by Rep. Sean Duffy (R-Wisc.) which would give the U.S. territory some sort of access to bankruptcy—as well as impose a financial stability council. Treasury Counselor Weiss last Friday, at a panel sponsored by the Bipartisan Policy Center, reported there have been “very positive discussions taking place on both sides of the aisle” in Congress, adding that there now seems to be greater agreement that any Congressional plan to help Puerto Rico avoid default and insolvency should include both restructuring and oversight. In his presentation last week, Mr. Weiss said the administration believes that restructuring of Puerto Rico’s debt could come through the Constitution’s Territorial Clause instead of through an addition to the U.S. bankruptcy code. (The clause in question reads: “Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.”) Mr. Weiss added that not all the territory’s debt would have to “be treated with a broad brush equally,” and that restructuring could take into account the many differences between Puerto Rico’s various debts, noting: “A special legislative act is required, tailored to the territories, consistent with Article 4 of the Constitution and that is neither for cities nor for states…It is on Congress recognizing the severity of this problem to agree in a bipartisan fashion on what those tools should be. It’s emergency legislation to deal with an emergency situation.”

Resident Commissioner Pedro Pierluisi, Puerto Rico’s sole representative in Congress, noted, in response to the emerging resolution, that he and other elected Puerto Rican leaders are concerned that any Congressional action not create a federal oversight authority that would impose too much control over the island’s municipalities: he said he would support an oversight authority as long as it respected Puerto Rico’s local governance, something both Republicans and Democrats have agreed is important to a final bill.

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.

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 & Mayhem and the Importance of Municipal Bankruptcy

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December 10, 2015. Share on Twitter

Human & Fiscal Disruption and Municipal Bankruptcy. Last week’s mass shooting in San Bernardino, in which 14 persons were killed, was reportedly planned up to a year in advance. It was not an event which could have been anticipated—much less incorporated in the city’s plan of debt adjustment to submit to U.S. Bankruptcy Judge Meredith 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? Now the city will have to bear not just the costs of its responses to this tragedy, but also significant new costs in the wake of it and to prepare for the future. What will these tragic events imply for the city’s residential assessed property values? Just as the elimination of blight and violent crime was a critical issue for Detroit’s plan of debt adjustment before now retired U.S. Bankruptcy Judge Steven Rhodes, so too San Bernardino will have little choice but to modify any proposed plan of debt adjustment to take into account the events with which it was beset. Might the federal government or the MIA State of California step in to provide some fiscal assistance?

It appears the suspected killers devoted as much time as the city has on its plan of debt adjustment in devising their own plan of human and fiscal destruction, commencing nearly two years ago, practicing with guns and making their own kinds of financial preparations in 2014: Syed Farook and Tashfeen Malik began honing their own fiscal and firearms skills last year at a shooting range in nearby Riverside, according to NBC, citing two sources, even as counter-terrorism officials said the pair began making monetary savings for their child and Mr. Farook’s mother during the same period—or, as one official noted; “[They wanted to] take care of both Grandma and the baby…They had purposely thought through that problem…[Some transactions] would be consistent with them making preparations for grandma and the kid.” The FBI is now investigating the incident for potential ties with terrorist organizations including the Islamic State in Iraq and Syria.

A week after the terrorist attack at the Inland Regional Center in San Bernardino that killed 14 people and left 21 wounded, more details have begun to emerge about the married couple the FBI believes to be responsible for the attack, Redlands residents Syed Farook and Tashfeen Malik, along with Farook’s former Riverside neighbor, Enrique Marquez. In testimony before the U.S. Senate Judiciary Committee yesterday, FBI Director James Comey said Farook and Malik had discussed jihad and martyrdom as early as 2013 and that both had embraced extremist Islamic ideology before their relationship had even begun — even before ISIS separated from Al-Qaida in 2014. Ironically, of course, these discussions and plan-makings were occurring even as the Congressionally imposed sequesters were reducing resources which might have helped save lives.

Letting Puerto Rico Help Itself. Sen. Orrin Hatch (R-Utah) yesterday blocked an effort by Sen. Charles Schumer (D-N.Y.) to pass to pass legislation to give the U.S. territory access to U.S. bankruptcy courts and allow Puerto Rico to restructure its debts in the same fashion as Detroit, Jefferson County, Central Falls, and other municipalities—rather than a bailout such as General Motors received. Indeed, Sen. Schumer specifically stressed that his proposal was not a “bailout,” warning that Puerto Rico’s fiscal and financial crisis will worsen absent action from Congress to permit the island to help itself: “If we fail to offer Puerto Rico assistance now, the problem will not be contained to the island…We have the tools to fix the problem. They’re sitting in the toolbox. The problem is Puerto Rico isn’t allowed to use them.”

Sen. Schumer’s comments came as the Chairs of three U.S. Senate committees, Sens. Orrin Hatch (R-Utah), Lisa Murkowski (R-Alaska), and Charles Grassley (R-Iowa) with jurisdiction over Puerto Rico and bankruptcy introduced a bill yesterday, the Puerto Rico Assistance Act of 2015, to create an authority which could issue municipal bonds and provide up $3 billion in resources to help Puerto Rico stabilize its budget and debt. While the proposed legislation would, if enacted, render some fiscal resources, it would not, however, provide the kind of bankruptcy protection available to every other U.S. corporation in the U.S.; rather, the bill would make clear that the U.S. is not bailing out Puerto Rico or pledging its full faith and credit to any bonds issued by the Financial Responsibility and Management Assistance Authority, whose six members would be appointed by the President; instead the measure would provide a 50% cut in the employee side of the payroll tax for five years and reduce the employee share of the tax to 3.1% from 6.2%. It proposes a number of studies, including on the Commonwealth’s pension plans and liabilities and the commonwealth’s healthcare treatment by the federal government. The legislation proposes to provide assistance to the island in improving its accounting and disclosure practices.

There was, mayhap, more constructive movement in the House yesterday, where Rep. Sean Duffy (R-Wis.), Chair of the House Financial Services Subcommittee on Oversight & Investigations, introduced legislation, the Puerto Rico Financial Stability and Debt Restructuring Choice Act, which would, if enacted, provide public authorities in Puerto Rico with Chapter 9 bankruptcy protection in exchange for the commonwealth’s acceptance of oversight from a Presidentially-appointed five-member Financial Stability Council, with Chairman Duffy stating: “This bill empowers the Government of Puerto Rico with the choice to partner with the Federal Government and put the island on a path towards balanced budgets and a return to fiscal security. If Congress does not act, it would have a devastating effect on the people of Puerto Rico and countless Americans throughout the states who stand to lose billions in the bond markets…This is a multi-pronged approach and a long-term solution. It cannot happen without adoption of legislation by the Puerto Rico Legislative Assembly which must be signed by the Governor. We know bailouts do not change spending habits. We need all sides to be fully committed to changing the way Puerto Rico manages its budgets, tax collection and finances.”

Chairman Duffy added: “The Puerto Rico Financial Stability and Debt Restructuring Choice Act gives the island’s leadership a choice: through the adoption of legislation passed by the Assembly and signed by the Governor, the Government of Puerto Rico will have access the same chapter 9 bankruptcy process that America’s States do if it also agrees to an independent Financial Stability Council to oversee the island’s path toward balanced budgets and a return to financial stability…The Puerto Rico Financial Stability and Debt Restructuring Choice Act will restore Puerto Rico’s access to an orderly debt restructuring process, without which the result would be disorderly litigation which is neither good for the island or its bondholders.”

In addition, the proposed bill would permit the appointment of a Puerto Rico Financial Stability Council: “In order to restore investor confidence and improve tax collection and budgeting practices, the Government of Puerto Rico may choose to accept the establishment of a 5-member Financial Stability Council with the authority to oversee the island’s financial planning and annual budgets. Unlike the D.C. Control Board of the 1990s, this Council will not be imposed on Puerto Rico – the island’s elected leaders in San Juan must agree to accept the Council. The Council’s duration will also be limited and it will not have the blanket authority to impose changes to Puerto Rico’s government. Rather, the Financial Stability Council will focus on just that: restoring financial stability to Puerto Rico.” Under the proposed bill, members of the Financial Stability Council would have to have knowledge and expertise in finance, management, and the organization or operation of business or government and would have to either have a primary residence in Puerto Rico or have their primary place of business on the island, according to the bill’s text. They could not provide goods or services to the commonwealth’s government and could not be a member of the government. Once established, the council would review an annual financial plan and budget from the governor and would have to approve it before the materials would be sent to Puerto Rico’s legislature. Any borrowing the commonwealth plans would also have to go through the council.

Gov. Alejandro García Padilla, speaking at the Puerto Rico Federal Affairs Administration in Washington yesterday, stressed that an extension of Chapter 9 municipal bankruptcy protections to Puerto Rico’s public authorities would not constitute a federal bailout; rather it would simply be a way to give Puerto Rico the “tools” it needs to fix its problems, adding that Puerto Rico is a lost ship of 3.5 million people sending a distress call to the federal government: “We are not asking for a bailout; we are asking for the tools to do the job,” adding that it was up to the federal government whether it wishes to answer the commonwealth’s calls. Nevertheless, he warned, if Congress continues its inaction, there will be a humanitarian crisis on the island.

Puerto Rico’s problem extends further than its $72 billion public debt and includes a lack of health care funding and federal tax credits that can put a halt to the large out-migration of its citizens and bolster the commonwealth’s economy. The governor, who has continually said the government does not have the funds to repay its debt, signed an executive order on Dec. 1 to pay $355 million in Government Development Bank notes that were due. But the order implemented claw back procedures that would take funds away from some lower priority bonds to pay back obligations backed by the commonwealth’s constitution. Puerto Rico has to pay $1 billion of debt service by Jan. 1 and the fate of that payment is uncertain with the lack of action from Congress. Gov. Padilla said he plans to meet with Treasury officials this week to further discuss the commonwealth’s position, but he did not have specific details on the meeting at the press conference.

The Drain. As we experienced in Detroit, a spiral of fiscal distress drains a municipality’s resources, costing streetlights, police response time, etc.—events and changes in fiscal capacity that can cause families to leave—that is, those that can afford to. Just as Detroit experienced a signal exodus before its filing for municipal bankruptcy, so too more than 200 Puerto Ricans leave the island for the mainland U.S. each and every day—those most able to afford to move, leaving behind those least able to make their own way and further sapping the Puerto Rican economy. At 5.7 percent, the unemployment rate in the Motor City is now ten percent below what it was six years ago—in a city where, between 2000 and 2014, 90,000 of its citizens moved out. The critical loss, of course, and most critical cause of its largest municipal bankruptcy in U.S. history, was the out-migration of its labor forces. As in Puerto Rico, key population shifts come from those most able to move—leaving those too old or too poor and dependent behind—and, of course, adding to the upside down imbalance on a city – or, in this instance – territory’s pension obligations. Puerto Rico biggest pension program has sufficient funds today to meet just 0.7 percent of its future obligations.

Forty percent of Puerto Rico’s citizens live below the poverty line. It is difficult, albeit, unfortunately, not impossible, to imagine the federal government ignoring the humanitarian crisis that would probably follow. But the longer Congress waits, the more vicious this cycle of those who can most afford to emigrate to the mainland and leave behind an ever accelerating shrinking tax base, rising taxes, and curtailed essential services will be. As U.S. citizens, the island’s migrants will be eligible for public support of various kinds on the mainland. There is no question, in other words, that the U.S. will end up bearing much of the cost of Puerto Rico’s past profligacy. The only question is how considered and efficient its assistance will be.

The Steep Road of Recovery

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December 2, 2015. Share on Twitter

The Steep Road to Recovery. The route out of municipal bankruptcy is long and steep, and requires everyone to pitch in—so it is that the city is filing 185 suits against some of its vendors in an effort to recover as much as $50 million paid to various firms in the months preceding its filing for chapter 9 municipal bankruptcy. According to Chuck Raimi, deputy corporation counsel, Detroit plans to file the suits for what he termed “preferential payments” which were made on account of past-due debts within 90 days prior to the city’s July 18, 2013, bankruptcy filing. The issue? Mr. Raimi argues fairness: the city paid those vendors more than other similarly situated creditors, so that, as he noted in his statement: “The city’s position is that the payments are recoverable as ‘preferences’ under the Bankruptcy Code…The firms in total received about $50 million in the 90 days before the bankruptcy filing.” The Motor City, whose plan of debt adjustment and thereby exit from municipal bankruptcy U.S. Bankruptcy Judge (now retired) Steven Rhodes approved a year ago, says it will attempt to settle the cases prior to a trial. In the nonce, Detroit has asked the federal bankruptcy court to temporarily suspend the vendors’ obligation to formally answer the complaints—the key is the stipulation in chapter 9 municipal bankruptcy of time limitations—so that Detroit was required to file any actions prior to this Saturday.

In a sense, the issue is about equity: trying to ensure that each and every creditor is dealt with fairly and to prevent certain of a municipality’s creditors from receiving a greater share of such municipality’s resources than others that are similarly situated—or that there is as much equity as possible in distribution of a municipality’s proceeds among similarly situated creditors, so that, typically, a portion of a city’s recovered resources would go toward funding payment of the unsecured creditors under the plan.

Striving to Climb Out of Debt. In testimony before the Senate Judiciary Committee, Puerto Rico Gov. Alejandro García Padilla yesterday testified the U.S. territory would give some of its debts priority over others, because, without recourse to municipal bankruptcy, Puerto Rico has reached a debt precipice where it has no choice remaining but to give some of its debts priority over others. Thus, the government has commenced clawing back revenue from certain non-general obligation full faith and credit bonds as a means of avoiding default on $355 million of Government Development Bank notes—or, as the governor testified: “Starting today, the commonwealth will have to claw back revenues pledged to certain bond issues in order to maintain essential public services…In light of the rapidly deteriorating revenue situation, in accordance with Article 6, Section 8 of the constitution of the Commonwealth of Puerto Rico, I ordered the ‘claw back’ of revenues assigned to certain instrumentalities of the commonwealth for the repayment of their debts. Together these instrumentalities have approximately $7 billion in bonds outstanding. In simple terms, we have begun to default on our debt in an effort to attempt to repay bonds issued with the full faith and credit of the commonwealth and secure sufficient resources to protect the life, health, safety and welfare of the people of Puerto Rico.”

Indeed, shortly after Gov. Padilla testified, the Government Development Bank for Puerto Rico reported it had paid all $355 million in debt service due on its notes. Thus, the testimony came at a pivotal moment as Puerto Rico is seeking to restructure about $70 billion of public sector bond debt—debt which the Governor testified is unpayable unless the economy improves. It also means that in the face of looming default, revenues have been diverted from the Puerto Rico Highways and Transportation Authority, the Infrastructure and Finance Authority, the Metropolitan Bus Authority, the Integrated Transportation Authority, and the Convention District Authority. Gov. Padilla, according to a statement from his office, had tried to negotiate with the insurers of some of Puerto Rico’s debt maturing yesterday, but no agreement was reached—or, as his Chief of Staff explained: “The administration’s priority has always been and will always be the welfare of Puerto Ricans, so while we tried to negotiate with the insurers of our bonds to refinance the payment that was due today, the terms and conditions that they wanted to impose on us were unacceptable to the government.”

In his testimony, Gov. Padilla noted that the “magnitude of the fiscal and economic problems bearing down on Puerto Rico are simply too large,” and that, with default imminent, the government had no choice but to choose between paying back creditors versus providing essential public services: “Commencing today, the Commonwealth will have to claw back other income sources in order to maintain essential public services. We have taken this step in the trust that Congress will act…But do not be misled. We have no resources left. Puerto Rico cannot keep this up longer.” Neither the Chair, nor other members of the Senate Committee asked any questions—nor provided any indication in Congress’ waning days of this session whether the Gov. could expect any response or action, notwithstanding the looming $945 million of total Puerto Rican municipal bond payments coming due on Jan. 1st.

The Senate Committee heard testimony from a second panel of five experts with remarkably different perspectives Puerto Rico’s fiscal sustainability, ranging from Professor Carlos Colón de Armas, of the University of Puerto Rico, who testified that Puerto Rico has the money to honor its debt commitment as originally contracted to Stephen Spencer, who represents funds such as OppenheimerFunds and Franklin Advisors in negotiations over the Puerto Rico Electric Power Authority debt, who strongly opposed providing Puerto Rico with recourse to municipal bankruptcy, claiming it would be harmful to the many retail investors both in Puerto Rico and the mainland U.S. that have holdings in Puerto Rico debt—adding that Detroit could be considered as proof that municipal bankruptcy can harm a city’s future access to the capital markets—adding: Detroit “wasn’t a bankruptcy, it was a stickup.”

Alternatives to Chapter 9. Given the apparent unwillingness to consider amending federal bankruptcy law to give Puerto Rico access to bankruptcy, other witnesses suggested alternatives: Alex Pollack, a resident fellow with the American Enterprise Institute, testified the best option would be an emergency federal control board, such as were successfully used for Washington, D.C. and New York City—indeed, Mr. Pollack was speaking on a panel with a former such control board overseer, former New York Lieutenant Governor and a member of the current Michigan oversight panel for Detroit, Richard Ravitch. Mr. Ravitch told the committee the best solution would be a municipal bankruptcy rubric which would modify the current federal 9 municipal bankruptcy law so that it could apply to the Commonwealth. Finally, Richard Carrión, executive chairman of Banco Popular in San Juan, recommended a three-part solution plan which would provide for bankruptcy, a control board, and some type of stimulus for the economy.

Gov. García Padilla and Rep. Pedro Pierluisi (Puerto Rico) urged the Committee to act on legislation which would offer the commonwealth a structured process through which it could resolve its debts, such as municipal bankruptcy, for Puerto Rico’s public authorities, noting that were Congress to act swiftly to pass a package of legislation to permit the U.S. territory to restructure its debt and provide improved healthcare and tax credit practices, he would agree to greater federal oversight – a concept which heretofore has been met with contempt from Puerto Rico officials.

The committee did not invite the administration to testify. The Obama administration has proposed a plan under which indebted governmental agencies, such as the island’s public power company, would be eligible to file for bankruptcy—just as any U.S. corporation may, and would provide for a restructuring of other debts and pension obligations. Under the proposed plan, the federal government would also oversee the territory’s future public spending, and residents of the territory, all U.S. citizens, would gain full access to various anti-poverty programs—programs currently which are less generous there than on the mainland.

The Alternative? With time running out both for Puerto Rico and for this session of Congress, continued inaction by Congress could well accelerate the withering of Puerto Rico’s economy and the exodus of those of its U.S. citizens who can find a way to move to the mainland. It seems, in some ways, almost reminiscent of East Berlin: economic opportunity is shrinking, in part because of federal policy, thus, more than 200 Puerto Ricans are moving to the mainland every day—adding to an economic whirlpool, because it appears to be that those most able to leave and most able to find a job on the mainland are departing—leaving those least able to relocate behind: today there are more Puerto Ricans on the mainland than in Puerto Rico. The exodus also creates a separate fiscal sustainability issue: public pension liabilities: the island’s pension program has sufficient funds to cover just 0.7 percent of its future obligations. The departure of those most able to find employment elsewhere risks widening that fiscal chasm.

Turning a Deaf Ear. If Congress refuses to act, it seems likely Puerto Rico’s leaders will have little option but to raise taxes—even as those most able to pay are seeking to leave—and the territory’s crippling 40 percent poverty level increase—so that there would be greater pressure for essential services, but a growing erosion of revenues. One can imagine a whirlpool now brought on by a shrinking tax base triggering ever higher taxes and reduced essential services, prompting still further emigration—likely triggering a humanitarian crisis. As American citizens, Puerto Ricans, whether on the island or newly moving to the mainland, will be eligible for public support, so that there can be little question but that the federal government will end up bearing much of the cost of Puerto Rico’s past profligacy. The question thus becomes when and how might be the most critical and effective way to provide such assistance.

Scouts’ Honor. Two former JPMorgan bankers have agreed not to violate securities laws and to repay money they made while working on transactions that ultimately thrust Jefferson County, Ala., into bankruptcy, according to documents filed by the Securities and Exchange Commission: The SEC entered consent agreements that Douglas MacFaddin and Charles LeCroy approved into court records in Birmingham, along with a motion requesting that federal Judge Abdul K. Kallon approve the judgments that will end the five-year-old case. Both men agreed, without admitting or denying charges, to injunctions against future violations of all five counts sought in the SEC lawsuit, which centers around sewer warrant transactions and swaps. Mr. MacFaddin agreed to pay a disgorgement of $201,224, including interest; Mr. LeCroy agreed to pay a disgorgement of $125,149, including interest, with both men having agreed to made payments within a year. The decision comes in the wake of the SEC’s November 2009 civil suit alleging that Messieurs LeCroy and MacFaddin improperly arranged payments to local broker-dealers in Alabama to assure that certain Jefferson County commissioners would award $5 billion in county sewer bond and swap deals to JPMorgan. The SEC suit charged that the two men “privately agreed with certain county commissioners to pay more than $8.2 million in 2002 and 2003 to close friends of the commissioners who either owned or worked at local broker-dealers.” The lawsuit sought declaratory and permanent injunctions against the two for federal securities law violations, as well as disgorgement of all profits they received as a result of the violations, plus interest.