The Steep Road Out of Municipal Bankruptcy

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November 9, 2015. Share on Twitter

The Steep Road out of Municipal Bankruptcy. While falling into municipal bankruptcy can be a crisis involving fiscal, stewardship, ethical, and criminal failures; getting out is the steepest road possible, because one’s city or county begins at such a disadvantage to all other cities and counties across the country. So imagine the hard choices and steps for Detroit: It is now one year since now retired U.S. Bankruptcy Judge Steven Rhodes approved the plan of debt adjustment to pave the way for Detroit to exit the largest municipal bankruptcy in the nation’s history, a year during which the unique state-foundation-city partnership forged under the aegis of Judge Rhodes and U.S. District Court Chief Judge Gerald Rosen paved the way for the Motor City to get back on its wheels. Exiting municipal bankruptcy does not, however—at a cost to the city and its taxpayers of $165 million, guarantee a fiscally sustainable future. Thus, while Detroit’s revenue streams appear on track or better than expected, progress on restructuring and restoring basic municipal services is consuming time, with some delays in key initiatives, such as hiring police officers. The city’s dysfunctional and embarrassing street-lighting system is nearly overhauled, and the greater downtown seems to be taking off with new development: it has already earned Detroit a bond rating upgrade. Detroit has replaced thousands of broken streetlights, and has sufficient funds to meet its daily bills and meet its reduced pension obligations; nevertheless, the task of trying to tear down thousands of blighted homes and commercial buildings, while improving city services—including public safety—has proven expensive. Moreover, critical issues not directly addressed by the plan of debt adjustment: fixing the city’s high poverty rate, unemployment, and poorly performing, fiscally bankrupt public schools—were largely left out of the plan; yet they represent grave threats to Detroit’s future. Nonetheless, Judge Rhodes told the Detroit News: “My impression is that the city is actually doing better at this point in time than we had projected during the bankruptcy case.”

The judicially approved plan cut more than $7 billion in unsecured municipal liabilities and provided for $1.4 billion over the next decade for basic services to rehabilitate a municipality which had suffered a severe population loss, criminal behavior by former elected leaders, and an inability to collect income taxes from both incoming and outgoing commuters. On the day the Governor’s appointed Emergency Manager Kevyn Orr dismissed the Mayor and Council, he estimated Detroit’s liabilities to be about $18 billion. Notwithstanding the erasure of so much debt, the city’s fiscal future still hangs in the balance: the road to recovery must overcome significant public school and public pension issues. To date, early returns for the investments since the city exited bankruptcy appear to be falling short: City officials and their watchdogs are already considering paying more into funds much sooner than prescribed by the city’s plan of debt adjustment, but how the city can pay is unclear. One of the most critical issues involves Detroit’s multibillion-dollar pension debt, where the plan will require the city to make a balloon pension payment, a payment estimated at more than $100 million, in 2024 alone—and that is assuming the city’s pension investments perform as anticipated. Or, as Michigan Treasurer Nick Khouri, who now chairs Detroit’s state financial oversight commission created during the bankruptcy, puts it: “We certainly know many people were hurt during the bankruptcy, but what would have been the alternative, and how would they have been hurt under the alternative?”

Detroit has benefitted too, not just from the federal judges and state leadership and investment, but also from its own business leaders: Detroit business leaders such as Dan Gilbert and Mike Ilitch are continuing to reinvest in the Motor City’s core, investing hundreds of millions of privately raised dollars to re-create neighborhoods where their employees and others can live, work, and play—investments which appear to be infecting enthusiasm from outside investors, including some of the country’s largest foundations and leading businesses, such as the Ford Foundation to JPMorgan Chase, and even India-based Sakthi Automotive. That is, there is important private investment in the Motor City’s economic and fiscal future—including some of the largest creditors during Detroit’s bankruptcy, who, nevertheless, assumed significant financial stakes in Detroit’s future by taking over city parking garages and securing redevelopment rights to landmark properties such as Joe Louis Arena. A $245-million bond offering to finance reinvestment in city services this summer came at a premium for the city, but it also benefited investment grades from rating agencies for a city once seen as earning only junk status.

A Tale of Two Cities? Nevertheless, outside of the core areas, for a physically enormous city of 139 square miles, but now with just a third of its former population, the task of recovery is bedeviled by the difficulty of focus. Indeed, as the Detroit News notes, some residents in neighborhoods have coined the phrase “Two Detroits” to describe a disconnect between the extraordinary redevelopment taking place in the city’s greater downtown core, even as in its fragile neighborhoods, the FBI reports Detroit to be one of the country’s most crime-ridden cities, despite nationally declining violent crime in 2014, according to FBI statistics. It remains a city of abandoned homes and buildings, and, as Wayne State law Professor John Mogk told the News, like the game whack-a-mole: “I think the city’s off to a very good start in removing blight, but it’s a moving target: As vacant buildings are removed, other vacant buildings crop up because of the rash of tax and mortgage foreclosures that are ongoing,” adding that the city’s high hopes of eliminating blight in as little as five years appear over-optimistic, albeit he regards a decade as more realistic. Nevertheless, that will be a challenge: Detroit is still losing population—surely, in some part—because of its separate, failing public schools. Thus, the city is still experiencing an outflow of citizens/taxpayers: the Census Bureau reported a 1 percent outflow in 2013.

Post-bankruptcy Governance. Emerging from bankruptcy is, after all, not only about restoring normalcy, but also about finding critical resources to invest in a competitive future. It is far harder to recover from than to fall into municipal bankruptcy. First, it requires restoring key municipal services: Detroit Mayor Mike Duggan reports that Detroit’s buses, for the first time in two decades, are meeting posted schedules, and that police and ambulance response times have been significantly reduced. Second, it requires constructing a fiscally sustainable future; thus, the city has begun that process by tearing down more than 7,000 blighted homes in the last year and a half; it has reversed fiscal deficits: revenues are growing: Mayor Duggan reports Detroit now expects to bring in more revenue than expected in its current fiscal year: thanks to rebounding real estate prices in neighborhoods across the city, property tax revenues are up; however, Mayor Duggan notes that income tax collections, the city’s most critical source of revenues, are coming in below projections. The Mayor notes: “We’re OK for now, but if we don’t deal with that, it will become an issue.”

Defining Fiscal Choices for the Future & Pensionary Apprehensions. Emerging from bankruptcy is about making defining choices. The centerpiece of Detroit’s plan of debt adjustment was its blueprint for the city’s future: the so-called grand bargain, an $816-million investment by the State of Michigan, some of the nation’s leading foundations, and the Detroit Institute of Arts (DIA) to preserve the city-owned art museum collection in exchange for helping to both reduce pension obligations and pay down the city’s pension debt. After emerging from the shadow of the city’s bankruptcy, the DIA hit its $100-million fund-raising goal for the grand bargain earlier this year: it is about directly confronting the long-term fiscal challenge of public pensions—that is, thinking outside the current year fiscal calendar to the issue which is vital to both a full emergence from municipal bankruptcy, but also about having a competitive workforce. For Detroit, that remains a front and center challenge: notwithstanding the concessions incorporated in the plan of debt adjustment, Detroit’s post-bankruptcy pension fund investments have performed below expectations in the first year after bankruptcy. And this is amongst the hardest of choices and responsibilities, because it requires such a disciplined, long-term commitment. Jim Spiotto, the guru of municipal bankruptcy, referring to the task before the city described the city’s approved plan of debt adjustment as “not only a grand bargain, but a grand bet,” adding that while the federally approved plan largely absolves Detroit of its obligation to pay into the pension system for a decade; nevertheless, “projecting 10 years out is quite difficult, so I think they are going to have to pay attention to that.” That is, perhaps the key inattention which contributed the most—along, of course, with criminally-related behavior by the imprisoned former mayor, now will require the most: Mayor Duggan and key city officials concur that the remaining municipal pension obligations are significant—even as early returns since the city’s emergence from bankruptcy have not been good: Detroit’s two pension funds reported rates of return on its investments of less than 4% in the first half of the year, not disproportionately from other cities and counties, but rather reflecting a poorly performing market: the Detroit General Retirement System, which covers most city retirees, posted a 2.7% return for the six months ending last June 30th, and projections are that the General Retirement System fund with a market value today of $2 billion could be worse, with a warning: It “will likely show an investment loss,” according to an actuarial report the week before last commissioned by the fund, wherein the most recent figures show the General Retirement System has a funding level of 62.5%–a level assuming the city will earn a 6.75% return on its investments in the coming decades—a likely optimistic assumption. Indeed, according to an analysis last month by the actuarial firm Gabriel Roeder Smith & Co. for the General Retirement System, if the return is lower — say 4.29%, or the equivalent of the current long-term municipal bond rate — the funding level would decline to less than 50%, a drop which could have fiscal and taxing consequences for not just Detroit’s employees, but also its taxpayers. Martha Kopacz, who analyzed the plan of debt adjustment for Judge Rhodes and serves as a member of the Detroit Financial Review Commission, is apprehensive that low public pension investment returns, especially in the early years, could mean the payments still owed by the city will have to increase when it resumes its funding of the system. Under the city’s plan of adjustment, Detroit is already obligated to pay its largest pension fund $118 million in 2024—even if the funds met projected investment returns, according to one recent pension analysis. Worryingly, as the invaluable Ms. Lopacz notes: “There was really no Plan B if it doesn’t work…People just get tired of me chirping about this, but this is a really big number.”

Can Detroit grow its way out of a pension problem? As part of Detroit’s court-approved plan of adjustment, the pension systems lowered their annual expected growth rate to 6.75% from 7.9%; yet what appeared to be a conservative adjustment might not have been sufficient: Eric Scorsone, Professor and Director of the Center for Local Government Finance at Michigan State University, worries that even that lower assumed rate of return could be a challenge to achieve: “To be quite frank (no, not a pun), what they’re using is still pretty high.” At a meeting late last month, Detroit Financial Review Commission member Darrell Burks, a former senior partner at PricewaterhouseCoopers, noted: “We need to be prepared — whatever the number is — to accept the reality that it’s going to be a substantial amount in 2024,” adding that he estimates an adjustment in the upcoming city budget “somewhere between $100 to $200 million to accommodate this problem.” Original forecasts submitted to Judge Rhodes with regard to the city’s public pension obligations showed the city paying roughly $92 million into the pension funds between now through 2024, aided in no small part by the so-called grand bargain; however, by 2024, pension payments made by the city alone could explode in subsequent decades: Detroit’s pension payments between 2024 and 2034 are expected to be roughly $1 billion, according to forecasts produced by former Detroit Emergency Manager Kevyn Orr’s staff, with the debt owed by the city remaining at about $900 million between the years FY2034 through 2044, before dropping to about $629 million, according to the 40-year projection submitted as part of the bankruptcy. As with a teeter-totter, Detroit leaders are counting on investments today to reverse the city’s population outflow and, thereby, increase its tax base—an increase which would enhance its ability to pay off its pension debt without blowing a hole in its budget.

Reversing Detroit’s Outflow & Investing in its Future: Let there be light! Indeed, the hard choices about what investments would be most critical to reversing Detroit’s out-migration which has left a smaller workforce to meet a growing number of pensioners is central to the city’s viable fiscal and sustainable future. One of Detroit’s plan of adjustment revenue-related proposals included $483 million in anticipated new municipal revenues realized from higher bus fares and improved tax collection—an improvement in part dependent upon a change in state legislation so that the city could collect income taxed owed by commuters both into the city—and residents who commute out of the city. Thus, in its plan, Detroit proposed both a $1.4-billion reinvestment initiative to rebuild the city, as well as to enhance its ability to realize some $358 million in cost savings from establishing a more efficient city government, savings which could then be translated into an addition to its reinvestment plan. But doing a 180 degree turn from disinvestment to reinvestment is a challenge: Detroit CFO John Hill notes Detroit’s municipal budgeting process is, most unsurprisingly, deliberately cautious: in the wake of its bankruptcy, that city has imposed stricter rules for each city department in order to meet financial goals. But this is a bold step and the space between cup and lip can be great: A $185-million project to overhaul and modernize the Motor City’s ancient and non-performing street-lighting system is on budget; it is ahead of schedule with more than 56,000 new LED streetlights installed of the planned 65,000, according to officials, thanks to the newly created Public Lighting Authority of Detroit. Seeing the light, many Detroiters are, unsurprisingly, pleasantly surprised: As the city’s patron saint of its exit from municipal bankruptcy, Judge Rosen, notes: “The lights are coming back on…All these new young kids moving back to Detroit, it really creates a sense of optimism and momentum.” But shedding light is, unfortunately, an achievement with consequences: it might better enable citizens and property tax payers to fret that the estimate by former Emergency Manager Orr had envisioned of as much as $500 million to battle blight over the next decade now, under the harsher light of fiscal reality, will be only what Mayor Duggan is able to snag from beyond the city’s municipal revenues. For his part, Mayor Duggan has empowered the Detroit Land Bank Authority to take the lead: the Land Bank, confronted with nearly 80,000 blighted or abandoned parcels, has auctioned and closed the sale of 527 houses to new owners and sold 2,655 vacant side lots to current homeowners, according to city figures; it has also posted 5,133 “eyesore” properties with notices of coming action and filed 3,246 lawsuits against the owners of those properties, with more than half of those cases already resolved in the city’s favor. Moreover, there has been a bonus to this hard-fought turnaround: Executive Fire Commissioner Eric Jones reports that the blight removal, to date, has been crucial to reducing the number of fires: “If you remove 7,000 blighted, vacant structures, that is fuel that arsonists don’t have to burn…it’s gone.” Nevertheless, it is a small bite of a colossal challenge: With roughly 100,000 vacant lots in the Motor City, and tens of thousands of vacant buildings, Detroit could devote years at its current stepped-up pace before ridding the city of all eyesores—years during which how to continue to finance this critical but unprecedented effort for any major American city will be harder and harder to answer.

Workforce Challenges. As if Detroit does not face enough challenges, the one it confronts with regard to labor is one of epic proportions. The revived Detroit Workforce Development Board, which convened for the first time late last month to tackle the goal of creating 100,000 jobs in the city, is working toward streamlining programs to create a systematic, unified approach to employing Detroit residents—residents who are disproportionately unskilled, underemployed, and undereducated—and where the challenge is further complicated, complex, and massive, because jobs do not match the population. Today, just over half of Detroit residents work—and of those who do, a majority have no more than a high school diploma. The future is hardly heartening: with the Detroit Public School System itself failing, it is hardly serving as a pipeline for Detroit’s future sustainability; the harsh reality for Detroit’s leaders is how to put 49,000 of its residents to work just to match the Michigan state average of labor force participation. Indeed, notwithstanding dozens of labor training programs, new business investments, jobs are not coming fast enough: Last year, Detroit had 258,807 jobs and a population of 706,663, according to an April report by the Corporation for a Skilled Workforce and funded by J.P. Morgan Chase & Co.: e.g.: only 0.37 jobs for every resident — one of the lowest levels in the country. Consultants and the expert witness U.S. Bankruptcy Judge Steven Rhodes hired to assess Detroit’s plan of debt adjustment questioned the capacity and ability of the city’s workforce to adjust, reporting that large numbers of workers and even managers lacked skills and education that would be prerequisites for their responsibilities. Detroit’s plan of adjustment calls for spending millions on training and retraining workers, in addition to an overhaul of the city’s human resources operations. That will be a critical effort: today, of the 258,807 jobs in Detroit, 71 percent are held by employees commuting from the suburbs—ergo the extraordinary situation of reverse commuting in the region—a region where there are more middle-to high-skilled jobs in the city than in the suburbs, but where the city’s work force is largely under trained and under educated: 38 percent of jobs in Detroit are considered high-skill, requiring at least an associate degree—a higher level than any of the city’s surrounding counties; but 63 percent of working Detroiters possess no more than a high school diploma, increasingly leaving city residents unqualified for jobs where they live. As Mayor Duggan told Crain’s: “What this says is that we need to do a whole lot better with our buses…We need a whole range of jobs, and what we’ve done is make it easier for business to open in the city by simplifying the permitting process.”

Trying to Put Out Fiscal Fires. As if Detroit and Mayor Duggan do not face enough superhuman trials, now chronic problems at the Detroit Fire Department are converting into higher fire insurance rates—hardly a change for a city seeking to draw in new residents—especially to a city which already has the highest rates in Michigan—and which now appear likely to rise again in the wake of a downgrade by Insurance Services Office, which analyzes and rates city and county fire protection for insurance companies—and which has downgraded Detroit, making the first change in Detroit’s rating in a quarter century—a downgrade, in effect, with immediate impacts on Detroit’s homeowners—changes in some cases of as much as 70%, with the impact of the rate change varying by agency and policy. The average premium in Detroit is about $1,700 per year, more than double the Michigan statewide average. Statewide, it was $802 in 2012, the last year records were available from the National Association of Insurance Commissioners. Eric Jones, who was confirmed last week as Fire Commissioner by the Detroit City Council, told the Detroit News that Mayor Mike Duggan is committed to improving the rating: “Clearly, Detroit was hurt by the downgrading of the status…The Mayor made it one of my highest priorities….It’s huge.” The Insurance Services Office (ISO) ranks about 48,000 municipalities across the country with regard to their ability to respond to fires — and save homes — on a scale of 1 to 10: the lower the number, the better the protection offered, noting that two decades ago, Detroit received a 2 rating, which escalated to a 4 by November of 2013. These ratings remain in place for a decade unless communities apply to the ISO to be re-evaluated—an application Commissioner Jones reports he plans to do by next year, as, in keeping with the city’s plan of debt adjustment, the city has been focused on replacing fire engines, fixing its 9-1-1 service, investing in new gear, demolishing some 7,000 vacant homes—homes which became targets for arsonists, and increased its fire department by more than 25 percent. Last year, fires caused $229 million in damage in Detroit, or nearly half the damage realized statewide, according to National Fire Incident Reporting System. Arson and burglary appear to be the two key ingredients which contribute to Detroit’s record as having the highest homeowner insurance rates in the state—but, without question, the combination of higher rates and the apprehension about arson and fire will increase the heat on the Department.

Foundation for the Future. Critical for any future for Detroit is fixing its fiscally bankrupt public school system—a challenge if the city is to have realistic hopes of drawing young families. State lawmakers and Gov. Rick Snyder are seeking to do the math and design a state financial rescue of the Detroit Public Schools by the end of this calendar year, an arithmetically $715 million state rescue of the Detroit Public Schools, but one where it is less the math, and more the politics that are proving to be an obstacle. The governance challenges involve both the fiscal costs and the governance reforms. Republican leaders are apprehensive about any proposed bailout and reforms, while Democrats oppose any bailout unless power is taken from the state-appointed emergency manager and restored to Detroit’s elected school board. Part of the challenge is any perception that a state bailout would be still another drain on the state for the City of Detroit—or, as Senate Majority Leader Arlan Meekhof (R-West Olive) perceives it, a source other than the state’s School Aid Fund, which would be drained by $50 a pupil for each of Michigan’s 1.5 million students for the next decide under Gov. Snyder’s proposed plan; whilst House Speaker Kevin Cotter (R-Mount Clemens) notes: “We want to take our time and make sure we’re doing right by them.”

Voting for a City’s Post-Bankruptcy Future. The San Bernardino Sun, in an editorial, could hardly have written it better:

“You are one of the 7,000-plus who voted in Tuesday’s election to seat four San Bernardino City Council members, we thank you. And we have a job for you. Tell your neighbors why you voted. Tell them why it matters. Tell them that while you’re happy to make decisions on their behalf, you’d rather see them disagree with you at the polls. Tell them to get involved. Three years into what is the city’s biggest crisis in a generation — municipal bankruptcy — it’s discouraging to see that so few residents took the time to choose a batch of city leaders who will be tasked with moving San Bernardino toward a more fiscally sound future. In the race for city treasurer, the only contested citywide race on Tuesday’s ballot, 7,367 votes were cast, according to unofficial election results. That amounts to slightly less than 10 percent of the city’s registered voters. There are those working to boost the city’s appalling turnout — which, by the way, is not unique. Countywide, turnout was about 10 percent Tuesday. But in a city where so much is at stake — from whether the city can afford to pay police officers to whether it can maintain public parks — it’s difficult to understand why turnout is not higher. We’re not alone in asking this question. The League of Women Voters of San Bernardino is puzzling its way through a plan to engage voters. Other groups such as Generation Now are working to get out the vote. Candidates themselves do a huge amount of networking with their supporters in trying to bring people to the polls.

And yet.

In a report on Tuesday’s dismal turnout, staff writer Ryan Hagen showed that, in the past three elections, the only one to crack the still-not-enough 25 percent turnout rate involved a controversial measure that would have changed the way the city pays its public safety employees. It also happened to coincide with the general election, a switch for San Bernardino. The city has long-held its elections for local office in odd-numbered years, as dictated by the century-old City Charter. Efforts to overhaul the charter have been met with mixed results (see the November 2014 attempt to erase the charter section outlining how the city should set salaries for certain public safety employees). But, based on recent experience, a group working to bring charter reform measures to voters may have reason to consider pushing forward with a measure to switch San Bernardino’s elections to even-numbered years, as Los Angeles has done. In the meantime, those who already know the power they wield by turning out to the polls have a few months to convince relatives, friends and neighbors in the 6th and 7th wards to take the time to vote in the February runoff. Their job is just beginning.

Waiting for Godot. Five bills which, could help avert municipal bankruptcy for Atlantic City and put it on the path to a sustainable fiscal future will become law today unless Governor and Presidential candidate Chris Christie intervenes—including a controversial plan, the Casino Property Taxation Stabilization Act (PILOT), to allow casinos to make fixed annual payments instead of highly variable property-tax payments, legislation intended to help reduce the instability and uncertainty of the city’s property-tax system—but legislation which surrounding Atlantic County’s top officials believe could do more fiscal harm than good, with Atlantic County Executive Dennis Levinson calling it “one of the worst pieces of legislation that anyone has ever seen.” The bill, if enacted, would permit casinos to stop making property-tax payments to the city; instead, they could make payments in lieu of taxes equivalent to $150 million in payments annually for two years, dropping to $120 million for each of the next 13 years. The bill, which the legislature sent to the Governor last June, along with bills to dismantle the Atlantic City Alliance, Atlantic City’s nonprofit marketing arm, and sharply reduce funding for the Casino Reinvestment Development Authority (an authority which uses casino-paid taxes to finance large local events and development projects). Under the pending state legislation, funds would be diverted from those agencies and instead go toward paying down Atlantic City’s debt and expenses. Despite how long Gov. Christie has had to react to these bills, however, he has been uncharacteristically silent. The issue of property taxes has put Atlantic City into a Twilight Zone of governance—caught between a state-appointed Emergency Manager and City Hall, but the underlying issue has been the difficulty for the city to have budgeting certainty in the wake of annual casinos court appeals over the assessed values: almost like spinning the dials, the appeals force the city not only to expend resources addressing the challenges in court, but also at risk of being mandated to make out-sized property-tax refunds to the gaming resorts—refunds in excess of $100 million, in one instance. Thus, as Assemblyman Vince Mazzeo (D-Atlantic) notes, if the PILOT becomes law, “[T]there will be no more tax appeals from the casinos.” The city is not alone in hoping the bill becomes law: the Casino Association of New Jersey, which lobbies for Atlantic City casinos, worries that more casinos will close if the bill is not enacted. New Jersey Assemblyman Chris Brown (R-Atlantic), a supporter of the legislation, told Bloomberg Atlantic City has made progress in reducing its budget, but its outstanding liabilities are still too large to convince him it will not need to increase taxes in coming years, stating he would prefer the bill to be rewritten to shorten the duration of the PILOT program and amend the formulas that determine the payment amounts, noting: “We have to find a way to stabilize property taxes for everyone in Atlantic County.”

Safeguarding a City’s Sustainable Fiscal Future. Romy Varghese, writing for Bloomberg this morning examined another peril that could lead to a fiscal drowning in Atlantic City: Even as its over reliance on casinos has imposed great fiscal risk, so too, it turns out, its public pension benefits have not exactly been fiscally lifesaving, reporting that, in what she termed: “[O]ne of those relics from the lavish and loud Prohibition-era Atlantic City depicted in television and film. Despite just a four-month beach season and a battered casino industry, lifeguards who work 20 years, the last 10 of them consecutively, still qualify at age 45 for pensions equal to half their salaries. When they die, the payments continue to their dependents. About 100 ex-lifeguards and survivors collected anywhere from $850 to $61,000 from the city’s general fund last year, according to public records. In all, it comes to $1 million this year. That’s a significant chunk of cash for a municipal government with annual revenue of about $262 million and, more importantly, it’s emblematic of the city’s broader struggle to downsize spending and contain a budget deficit that has soared as the local economy collapsed. Kevin Lavin, the emergency manager appointed by Governor Christi, has cited lifeguard pensions as a possible item for “shared sacrifice” in a community already forced to fire workers and raise taxes. Mr. Lavin is expected to report this week on the likely timetable for his report and recommendations. Mr. Varghese notes the lifesaving benefits of lifesaving in the fiscally distressed city: “About 100 ex-lifeguards and survivors collected anywhere from $850 to $61,000 from the city’s general fund last year, according to public records. In all, it comes to $1 million this year—emblematic of the city’s broader struggle to downsize spending and contain a budget deficit that has soared as the local economy collapsed.” Mr. Lavin, in his report which could be completed this week, is not expected to throw a lifeline to the retired but unretiring lifeguards, citing the lifeguard pensions as a possible item for “shared sacrifice” in a community already forced to fire workers and raise taxes. By the same token, the retired lifeguards appear unlikely to sit on their lifeguard stands and idly play their beach ukuleles whilst their pensions are floated out to sea, with one noting: We worked under the precept that we were going to get a pension, and that’s a certain amount of money…I’m not responsible for the mismanagement of the politicians, and I’m not responsible for the casinos leaving.” Or, as they might say at one of the city’s casinos” ‘A card laid, is a card played.’

Municipal Elections: Will They Provide a Platform for Fiscal Sustainability?

November 6, 2015. Share on Twitter

Voting for a City’s Post-Bankruptcy Future. In an election, where a majority, or four of the seven San Bernardino City Council seats were on the ballot, to determine half of the leaders who will shape whether and how San Bernardino might emerge from the longest municipal bankruptcy in U.S. history, only one-third of the city’s residents are even registered to vote. The greatest number of votes—in an election with an abysmal turnout of about 10 percent—came in the race for city Treasurer, where the incumbent, David Kennedy easily won reelection by a 2-1 margin. Or, as City Clerk Gigi Hanna, who was re-elected in an uncontested election, describes it: “It’s abysmal,” referring to the low turnout: “It’s a perennial problem in this area.” Councilman John Valdivia, who ran unopposed, was re-elected with 641 votes. In the 6th Ward, four candidates split a total of 983, while there were just over 1,500 votes cast in the 5th and 7th wards—where in the latter, 7th Ward Councilman Jim Mulvihill will face a runoff — albeit it remains uncertain who his opponent will be. Final, unofficial results appear to indicate that Bessine Littlefield Richard will face Roxanne Williams in a runoff for the 6th Ward. In the 5th Ward race, incumbent Henry Nickel won re-election with 66 percent of the vote, while incumbent San Bernardino Treasurer was easily reelected with 71 percent of the vote. In the city races where none of the candidates reach 50 percent, the top two vote-getters will advance to a February run-off. The runoff in the 7th – in the north end of the city, where the abysmal voter turnout was about 5% — centered on incumbent Councilmember Mulvihill, who had been elected two years ago in the wake of a recall election of Wendy McCammack. In the 6th Ward race to replace retiring Councilman Rikke Van Johnson, Littlefield Richard of San Bernardino County’s Workforce Development Department has been narrowly leading Roxanne Williams, a program specialist for the San Bernardino City Unified School District — 370 votes to 356 votes — reversing their order from the first round of results. However, both are assured placement on the runoff ballot, beating out Anthony Jones (156 votes) and Rafael Rawls (101 votes). Challenger Karmel Roe failed to dislodge the long-term hold of incumbent City Treasurer David Kennedy, who has served for some 24 years. A mortgage broker who ran for Mayor two years ago and the 5th Ward City Council in 2014, Mr. Roe attacked Treasurer Kennedy for not having done more to help a bankrupt city. The specific commitments Ms. Roe campaigned on that said she would do to change the office — demanding audits, taking control of the Finance Department, encouraging economic development in the city — are, however, not issues in the city which the treasurer is authorized to handle under the current city charter. Incumbent City Attorney Gary Saenz, City Clerk Gigi Hanna and 3rd Ward Councilman John Valdivia all, successfully—and unopposed, were re-elected.

Waiting for Godot. S&P yesterday reported it was keeping Atlantic City on credit watch negative as the credit rating agency awaits both an updated report by Emergency Manager Kevin Lavin and an expected decision by New Jersey Governor and aspiring GOP Presidential candidate Chris Christie whether and when he might sign into law a financial assistance package approved by the New Jersey State Legislature. Atlantic City Revenue Director Michael Stinson said he expects resolution on the fate of the legislature-approved rescue package by next week before the state Assembly and Senate return to session. If Gov. Christie takes no action before the new session, the five bills automatically become law, according to Mr. Stinson: “If the bills are passed than we are going to get revenue…The uncertainty of the bills should be resolved by next week.” Atlantic City, which is in a fiscal and governance Twilight Zone, with its municipal finances overseen by a state-appointed overseer and Mayor Don Guardian, is closing a $101 million budget deficit this year by firing employees, and crossing its fingers for a state assistance package approval. The city’s proposed budget, approved by the state’s Local Finance Board at the end of last month, depends on Governor and Presidential candidate Chris Christie’s approval of bills that would allow the city to spend $33.5 million of revenue from casinos that now goes to redevelopment projects and marketing. The Atlantic City budget was adopted nine months late, but came in time to mail fourth quarter tax bills and also fully funds its annual requirements for settled tax appeals. Emergency Manager Lavin, testifying before the legislature in Trenton, told state lawmakers the budget was an initial step to ease a fiscal crisis in the city, while Mayor Guardian testified: “We understand that we can’t get out of this by ourselves.” The unique partnership between Mayor Guardian and state-appointed emergency manager Lavin has led to the dismissal of more than 100 employees, reducing the city’s workforce by nearly a third, and deferring payments for employee pensions and health-care benefits, while continuing to meet Atlantic City’s obligations to its municipal bondholders. Nevertheless, S&P last month cut the city’s credit rating deeper into junk, because it had yet to lay out detailed plans for dealing with its fiscal distress. S&P ranks the debt B, five levels below investment grade. Moody’s Investors Service grades it two steps lower at Caa1.

S&P analysts Timothy Little and Lisa Schroeer noted in a report yesterday that while the state’s Local Finance Board approved a balanced Atlantic City 2015 budget in late September, that budget relies on anticipated revenues of $33.5 million in redirected casino taxes and $38.9 million in deferred pension and health care expenses. The pending assistance package adopted by the legislature last June of five bills would allow the redirection of casino taxes to pay debt service. S&P said the city reported it will be able to make an $11 million December 2015 debt service payment even the anticipated redirected casino tax revenue is not received. S&P dropped Atlantic City’s credit rating three notches by S&P in August due to uncertainty over whether it could meet its 2015 fiscal obligations. Now the city awaits both the decision of the peripatetic Gov. Christie as well as a second report from Emergency Manager Lavin which is expected anon. The city is rated Caa1 by Moody’s Investors Service.

Unaccountability? The road to municipal bankruptcy can be paved by inattention and unaccountability. Thus, a California audit of the City of Beaumont, an LA suburb, found that the city failed to properly account for nearly three quarters of a billion dollars’ worth of municipal bond transactions and that the municipality was unable to provide the State Controller’s office with any accounting records for the bond transactions—and that neither the current city management nor its employees were able to provide any information or records of bond transactions, according to the audit. Beaumont officials say they are already taking steps to address what the report called pervasive shortcomings resulting in non-existent accounting controls for the city: the state report found that 95% of the city’s internal control elements reviewed in an audit of fiscal years 2012-13 and 2012-14 were inadequate—or, as California Controller Betty Yee stated: “These kinds of deficiencies are of great concern,” adding: “However, I am encouraged that city leaders recognize the need to implement major improvements.” The audit uncovered widespread deficiencies that rendered them effectively non-existent, with 75 of 79 internal control elements determined to be inadequate, or, as Ms. Yee explained: “These kinds of deficiencies are of great concern, especially to the citizens of Beaumont, who rightly expect their city government to safeguard their tax dollars.” The state fiscal investigation came in the wake of an FBI and Riverside County District Attorney’s Office search conducted at Beaumont City Hall. Controller Yee launched her audit last May, a month after the Riverside County District Attorney’s office and the FBI executed warrants at City Hall, former City Manager Alan Kapanicas’ house, and the Beaumont offices of Urban Logic Consultants, a firm which had provided many of the city’s top managers on a contract basis. No charges have been filed, but the investigation is ongoing; the audit found improper accounting by three city agencies for bonds issued between 1993 and 2014.

Among the state findings:

  • The city failed to properly account for bond transactions by three of its units, including financing and utility authorities and a community facilities district that together issued $626 million in bonds. As a result, the Controller’s team could not determine whether the bond proceeds were used for the intended purposes.
  • The former city manager and former public works director, both principals of outside consultants that provided city staff, received fees from bond proceeds for their services. In the absence of any written agreements, it was unclear whether these services were separate from their responsibilities as city officials. These two officials approved payments to the consulting companies where they were principals, creating conflicts of interests.
  • In 2008, Beaumont obtained a reseller’s permit from the state Board of Equalization, allowing it to purchase items outside the city without paying sales tax, even though the city did not appear to be in the business of selling goods. Beaumont also allowed one of its vendors to use the permit. The arrangement allowed the city to shift sales tax revenues from other jurisdictions by moving the supposed point of sale within its boundaries.
  • The city did not consistently follow its competitive bidding laws. City staff bought equipment or let contracts for public works without competitive bidding, arguing that the vendor was the only source, yet failed to provide documents supporting this claim. In 2013, the city entered into a no-bid contract with Urban Logic Consultants that allowed engineering projects to be approved through “job cards” rather than open, competitive bidding.
  • The city lacked receipts and descriptions for credit card purchases, supporting documentation for loans made to employees, and sufficient records for a loan to a private business. Invoices were missing, including purchases from a construction company totaling more than $1 million.
  • For five years in a row, the city ended the fiscal year with material deficits of as much as $10 million in its General Fund. It did not have sufficient revenue to fund existing levels of service. The city said it would cover these deficits with $21.5 million owed by its redevelopment agency. However, the redevelopment agency has been dissolved and it is highly uncertain that amount can be collected.
  • Beaumont failed to do timely bank reconciliations and did not segregate staff duties.

According to acting City Manager Elizabeth Gibbs-Urtiaga, the findings of the Controller’s office confirm what the City Council and the new city management team uncovered last summer, in the wake of which, last month, the former city manager signed a separation agreement valued at $213,702.75 to terminate his contract, according to city documents—or, as Beaumont Mayor Brenda Knight said in a statement: “We have been very busy correcting the business practices going forward.”

Bankruptcy: To Be Eligible or Not to Be, that is the question.

October 5, 2015

Who’s on First in Atlantic City? There was a bankruptcy filing in Atlantic City yesterday: American Apparel is filing for Chapter 11 bankruptcy protection, a filing which came after the Los Angeles corporation reported that its U.S. retail stores will continue to operate and that its international stores are not affected, but a plan which would, pending approval by a federal bankruptcy court, erase more than $200 million in bonds held by the retailer in exchange for equity interests. Lenders will provide about $90 million in debtor-in-possession financing. The company’s board has approved the restructuring plan, which is expected to be completed in about six months—and then will await the court approvals. In contrast, there has been no municipal bankruptcy filing by Atlantic City, notwithstanding the continued silence from Presidential candidate and New Jersey Governor Chris Christie with regard to whether and when he might interrupt his campaign to sign financial relief provisions long since sent to him by the New Jersey legislature to authorize the city’s casinos to make payments in lieu of taxes over the next 15 years and reallocate the casino alternative tax to pay debt service on Atlantic City-issued municipal bonds. In the strange municipal leadership dilemma in which Mayor Don Guardian sits—awaiting action by an absentee Governor and not fully clear about the hydra-headed governance situation where the mostly absentee governor has appointed an emergency manager to act in an ill-defined role as a quasi co-mayor—Mayor Guardian nevertheless is focused on efforts to signally change the city’s fiscal dependence on casinos by diversifying the city’s economic base. Nevertheless, with a $101 million deficit and delayed FY2016 budget (adopted last week), in addition to a withering credit rating; Mayor Guardian has cut the city’s personnel by 400 positions, and worked with his Council to help plug the budget gap—even as he and his fellow elected Councilmembers await Emergency Manager Kevin Lavin’s expected second report, which is to include fiscal sustainability recommendations—recommendations in this strange, two-headed quasi municipal governance situation—and in which the missing Governor’s action will be critical. Notwithstanding his tenuous authority under New Jersey’s unique municipal bankruptcy laws, Mayor Guardian is not just sitting around twiddling his thumbs; rather he is focused on his city’s future, telling the Bond Buyer’s Andrew Coen: “I want to prepare my city for the next recession…Whether that is five or 10 years away, I want to make sure that we’re a lot more than just a resort town so that we become resilient.” That focus, especially since quasi hurricane San Joaquin opted to not vent its physical fury on the city, will be easier in the wake of New Jersey’s Local Finance Board approval of the city’s budget, which opened the way for Atlantic City to proceed with fourth-quarter tax bills and tax-lien sales for some big delinquent properties among current and former casino hotels.

The Anomalies of Municipal Bankruptcy. Hillview, Kentucky, the small (population under 10,000) home rule-class municipality in Bullitt County, Kentucky—a rural farming community just a hop, skip, and jump from Louisville, which filed for chapter 9 municipal bankruptcy in August—the first filing for a municipality since Detroit’s filing more than two years’ ago—might find its filing unavailing. Having ignored the electronically musically and sound advice of retired U.S. Bankruptcy Judge Steven Rhodes, who oversaw the largest municipal bankruptcy in U.S. history, Steven Rhodes, the small city could be digging itself into a deeper fiscal trough, even as it preps to argue before U.S. Bankruptcy Judge Alan C. Stout. Judge Stout will have to determine if the municipality’s filing was done in good faith, in addition to assessing the justifications. The municipality’s largest creditor, Truck America LLC, which has been awarded an $11.4 million judgment against Hillview (with the interest bring the growing amount of said award now up to $15 million) has filed an objection with the U.S, bankruptcy court, arguing the municipality is ineligible because its petition to the federal court which the municipality relied on to file for reorganization “suffers from a fatal flaw: it refers only to the now-repealed Bankruptcy Act.” The objection, which in a sense echoes earlier moody warnings from credit rating agency Moody’s that: “Generally, a municipality must prove that it is not paying its debts on time or is unable to pay the obligations as they become due,” a bar which the credit rating agency had noted would be difficult to overcome, as the municipality had the fiscal capacity to increase its property and occupational license taxes—not to mention the authority and ability to issue bonds to pay for losses in legal judgments, according to the credit rating agency. In its objection to the federal court, Truck America’s attorney wrote that Kentucky courts would likely require that the Kentucky Legislature amend state law (in this instance, §66.400), the Bluegrass State’s municipal bankruptcy statute, under which two municipal entities, both utility districts, have previously filed. Truck America, in its brief, also wrote that Hillview had not negotiated in good faith to settle its court-awarded $11.4 million claim over a contract dispute as required by the bankruptcy code, noting: “Hillview did not file Chapter 9 in good faith to adjust its debts, or to ameliorate bona fide financial distress…Rather, it admits to being ‘fiscally sound’ and filed this case for the specific purpose of minimizing the amount it will be required to pay one creditor—Truck America—on account of a judgment affirmed by Kentucky’s appellate courts,” adding that impairing a single creditor is not a legitimate municipal bankruptcy objective. Interestingly, in its filing, Truck America wrote that the municipality had not complied with Kentucky’s constitution—specifically the provision therein which requires that the state’s municipalities raise taxes in order to pay authorized indebtedness, such as a judgment, within 40 years. If that were not enough of a fiscal nightmare, last August, Hillview Mayor Jim Eadens said the city is exploring malpractice claims against its former attorney. He did not provide any details.

Is Dissolution an Alternative to Municipal Bankruptcy?

April 17, 2015
Visit the project blog: The Municipal Sustainability Project

Classes of Creditors in Municipal Bankruptcy. The City of San Bernardino, beset by an ever nearing deadline to put together and submit a plan of debt adjustment by U.S. Bankruptcy Judge Meredith Jury’s May 30th deadline, has now requested dismissal of a suit filed against the municipality by two creditors that loaned money in good faith to the city. Unsurprisingly, the creditors are seeking the same repayment terms as the California Public Employee Pension System (CalPERS). That seems to have motivated San Bernardino to consider proposing its own bankruptcy reorganization sparing cuts to its CalPERS pensions. San Bernardino, which filed for Chapter 9 municipal bankruptcy in 2012 and stopped paying CalPERS $24 million-a-year obligations, announced last December that it planned to begin paying CalPERS’ annual payment as well as make past-due payments. That change of heart, however, has spurred Ambac Assurance Corp., a New York bond insurer, and EEPK, a Luxembourg bank, to file suit with the U.S. Bankruptcy Court, in an echo of legal challenges from Stockton’s municipal bankruptcy, with regard to the equity of full payments to one creditor—CalPERS, whilst it has halted payments to these two creditors: EEPK and Ambac claim their bonds are part of a “single pension obligation”–the equivalent of the city’s relationship with CalPERS, arguing in their briefs that whatever payments the City of San Bernardino makes to CalPERS, it must make equal payments to EEPK and Ambac. In response, San Bernardino’s attorneys have sought to have the court dismiss the suit, arguing that the argument being made by EEPK and Ambac “transcends novelty” and is “made out of whole cloth,” adding, with emphasis, that the city has yet to file a plan of debt adjustment detailing how it would propose to treat EEPK and Ambac’s debts, not to mention its debts to thousands of its other creditors. San Bernardino City Attorney Gary Saenz told the new agency Reuters that San Bernardino will propose a repayment plan which will propose reductions to certain creditors in “an amount that is fair and reasonable,” adding that cutting CalPERS would trigger substantial pension payment reductions to current and future retirees, driving many municipal employees to take jobs elsewhere: “You can’t have a workforce without pensions.” Judge Jury has scheduled a hearing for May 11th to hear arguments why San Bernardino should be allowed not to pay creditors on an equal basis.

Communicating Distress. A key challenge in a municipal bankruptcy is how a city and its leaders communicate to the public: think of a ship foundering at sea and the important mission and responsibility of the captain to communicate to the crew and passengers. Nevertheless, the issue has continued to be a sore one for San Bernardino—with part of the issue whether the bankrupt city should hire an outside firm or do the work in house. City leaders, indeed, say the city needs a professional to clearly articulate the city’s activities and plans, especially now, as the city nears its federally set end game to complete and adopt its exit plan for approval by the federal bankruptcy court. Having failed to gain consensus on this issue last March, when a majority of the City Council disapproved of an earlier proposal of a two-year contract for $215,000 with an Orange County firm, City Manager Allen Parker is, this time, instead asking the Council to recreate an in-house position for a “manager of communications” which he hopes could be in place soon as early as May Day—the hoped for date when the city hopes to be able to inform its citizens about its plan of debt adjustment. The issue of such communication to the public is another area in which municipal bankruptcies can have significant differences—for when a city’s elected officials, as opposed to a state-appointed emergency manager, remain responsible for the city, they also remain bound to be transparent and accountable to the citizens and taxpayers. Manager Parker said that if the City Council approves the position, he intends to hire a Spanish-speaking San Bernardino resident with 16 years of public relations experience, albeit he requested that the person not yet be identified, because the position has yet to be approved. Mr. Parker noted that the city has received proposals from public relations firms and that a firm, as opposed to hiring someone as an employee, remains the ideal choice; yet he said he did not think the council would approve any of the firms―a position with which Councilman John Valdivia does not agree, arguing that interested firms ought to be permitted to make the case they should be hired instead, and the Council be allowed to make the final choice: “Why don’t we have Motion 1 (to hire an individual), or motion 2, consider the remaining firms and allow them to give a three-to-five-minute presentation?…What can they offer, what can they bring to the city and what’s the plan?” For his part, Mayor Carey Davis noted that a spokesperson of some kind is overdue: “It’s important to have the voice of the city represented as correctly as possible…When you have that function in place, then that communication is focused and you can make sure that the other department heads know where that central voice is culminating and it gives us an ability to better manage, I think, the communication from City Hall with the community…As we move into adopting the Plan of Adjustment and its subsequent implementation there’s going to be a heightened need for clear messaging and clear information to be provided.”

Last January, CalPERS announced its solvency had improved and that its public pension plan was only $89.7 underfunded (see its “Rainbows, Butterflies and Unicorns” analysis, which purports the giant state public pension agency can pay 77 percent of its pension promises by compounding earnings at 7.5% for the next 30 years. Many analysts, however, counter that if CalPERS were only to realize 4.5% a year–a rate conservative private sector pensions aim for–the fund’s long-term liability could be staggering. In addition, some fear that an even bigger solvency risk for CalPERS is that its municipal clients are unable to continue making the contribution percentage required by statute, membership category and benefit formulas to fund their 1,126,133 covered employees’ pensions. Approximately 50 California cities that have not filed for bankruptcy have declared a financial emergency claiming they may not be able to meet their financial obligations.

Attacking Abandoned Housing in the Motor City. Detroit Mayor Mike Duggan yesterday announced a new mortgage program he has proposed to address a unique hurdle to the city’s future fiscal sustainability: its thousands upon thousands of empty, abandoned houses. For the Mayor, the financing not only offers a way to address the city’s severe challenge of abandoned housing, but also to address affordability, because rents in Detroit are so much higher than the cost of ownership: “You could be paying $800 a month in rent, but you can’t get a mortgage for a similar property when the payments would only be $400.” A critical challenge has been access to housing credit or mortgages: last year, just 10 percent of Detroit homebuyers were able to obtain a mortgage: the only alternative was cash on the barrelhead. Part of the difficulty is that the bulk of the abandoned properties require significant in order to be safe and habitable; yet, the cost of fixing them up is often in excess of their underlying value—this in a city where the median home price as of February was $26,000, according to RealtyTrac. Thus, in his remarks yesterday, Mayor Duggan noted: “We know that the desire to renovate these houses and rebuild our neighborhoods is there…What we haven’t had is enough lenders willing to take a chance on our city to show what’s possible.” Under the Mayor’s new program, the Detroit Neighborhood Initiative, Mayor Duggan has found partners with Bank of America, the Neighborhood Assistance Corporation of America, and the Detroit-based Opportunity Resource Fund to create a mortgage-type loan to overcome federal obstacles which, in most instances, bar lending for more than a home is worth. Under the new program, mortgages will be available for up to 110 percent of a home’s value―or even up to 150 percent if purchased through the Detroit Land Bank Authority home auctions. In addition, the new loans will offer favorable terms and be available to anyone who will live in the house and does not already own a property, including:
• 0 percent down
• No closing costs
• No fees
• No maximum income
• Credit score is not considered
• Below market fixed rates (currently 3.5 percent for a 30-year loan and 2.875 percent for 15 year)
• Ability to buy down the interest rates to near 0 percent
• Loans of up to $200,000

Gambling on Real Estate. A most difficult fiscal challenge for Atlantic City to avert municipal bankruptcy is the region’s reliance on property taxes: RealtyTrac reports that Atlantic County again led U.S. metropolitan areas in foreclosure activity rates in the first quarter of 2015—reinforcing the recognition of the region’s battered real estate markets on the city’s fiscal future. According to the company, Atlantic County, where one in every 113 housing units had a foreclosure filing, led the country, ahead of Rockford, Illinois, and Ocala, Florida. Moreover, that lead continued in the last quarter too. Foreclosures in all area counties and New Jersey rose in the first quarter from one year ago: Atlantic County was up 46 percent; Cape May County, 35 percent; Cumberland County, 16 percent; and Ocean County, 25 percent. New Jersey was up 17 percent in that period: the state had the fifth-highest foreclosure rate in the country in the first quarter, according to RealtyTrac. In South Jersey, the largest single jump came from notices of sheriff’s sales — the auctions listed in newspapers of specific properties lenders are preparing to sell. In the wake of the jobs attrition from Atlantic City casino closures, expectations are that short sales, distressed sales, and bank-owned properties will short the real estate market for the next five years. Already banks are putting more inventory out for sale, even as the market appears rife with abandoned properties. Combined with vandalism and stolen pipes and heaters, homes in bad shape are becoming a further hindrance to hopes for recovery. The RealtyTrac numbers put in statistics the very real fiscal challenge Atlantic City Mayor Don Guardian spoke so eloquently about at the New York Federal Reserve this week when he noted his city’s 88% reliance on the property tax—but where the assessed value of his city’s properties have declined by 85 percent.

The End of the Road, or an Alternative to Municipal Bankruptcy? Guadalupe, California, a small municipality of 7,080 established in 1840—a town where Father Junipero Serra brought some of the first cattle into a region of the state that has become a cattle mecca, appears at the end of its proverbial rope. In the wake of the fourth Grand Jury report since 2002 examining the city’s fiscal dysfunction, the findings and recommendations note there appear to be no bridges to solvency, concluding that the City Council of Guadalupe should take the necessary steps to disincorporate. In its report and findings, “Guadalupe Shell Game Must End,” the grand jury concluded that more than a decade of financial mismanagement, a declining tax base, and increasing debt obligations have all but ensured the fate of the municipality—slightly larger than formerly bankrupt Central Falls, Rhode Island: Guadalupe is a 1.3 square miles working-class town, which, according to the grand jury, is replete with well-intentioned, but incompetent bureaucrats, who “inappropriately” transferred about $7.6 million from restricted funds to cover budget shortfalls, but ignored the recommendations of city audits and prior grand jury reports to trim expenses. With costs projected to outpace revenue, the grand jury report determined that by “moving money from one account to another to keep the city afloat,” the city had engaged in a “shell game” that must come to an end with disincorporation. Nonetheless, City Administrator Andrew Carter said he doubted that the Guadalupe City Council would follow the grand jury’s recommendation, which is not binding―meaning that the state or the city’s voters, under California law, could force through the legal multi-stage process—in the likely event that the Council refuses to act on the recommendations (please see below). Indeed, Andrew Carter, Guadalupe City Administrator notes: “There’s nothing in the report that we don’t already know.” Mr. Carter faulted grand jurors for focusing on previous financial errors by past management and providing insufficient credit to recent efforts to turn the city around, noting that city employees have taken a 5% pay cut, and this winter, ground broke on a long-awaited housing and commercial development which is expected to boost tax revenue by adding some 800 homes. In addition, last November, voters overwhelmingly approved three tax initiatives that are expected to reap an additional $315,000 for the municipality, adding: “I doubt that any other community voluntarily imposed three tax measures on themselves (mayhap forgetting Stockton’s voters).” Mr. Carter added that additional changes in utility and other taxes should yield a balanced budget for the next fiscal year, noting that Santa Barbara County officials’ suggestion that Guadalupe disband strikes some Guadalupe citizens and taxpayers as discriminatory: “The demographics of Guadalupe are the exact opposite of the demographics of Santa Barbara’s.” According to the U.S. Census Bureau, about 87% of Guadalupe’s residents are Latino, of whom some 6 percent have a college degree. In Santa Barbara, about 42% of residents have a college degree; 38% are Latino. Dissolution of a municipality in the Golden State is rare, but not novel: The last city to dissolve itself was Hornitos in Mariposa County in 1973, one year after the city of Cabazon lost its legal status and was integrated into unincorporated Riverside County. In recent years, Jurupa Valley, Vernon, and Maricopa have edged close to dissolution. At a meeting Tuesday night — the first time the City Council has met since the report was issued last week — members were expected to appoint two of their peers to draft a response to the grand jury. The city’s response is due within three months.

Santa Barbara County Grand Jury Key Findings:
The Jury challenges the Guadalupe City Council to realistically consider the disincorporation recommendation when responding to this report.

FINDINGS AND RECOMMENDATIONS
Finding 1. Guadalupe does not generate enough General Fund revenue (sales tax, property tax, and bed tax) to pay for General Fund expenses, such as police and fire operations.
Finding 2. Guadalupe’s current debt payment obligations will increase annually until 2024 with insufficient corresponding increases in revenue.
Finding 3. The recent passage of Measures V, W, and X will not provide a long-term solution to Guadalupe’s financial issues.
Finding 4. There is no revenue to restore salary or benefits to employees who have agreed to furloughs and salary cuts, or to add staff.
Finding 5. There is no revenue to build up a reserve fund for emergencies or pay for needed infrastructure repair.
Finding 6. There is no revenue to eliminate the need for the City of Guadalupe to borrow an additional $330,000 per year to meet General Fund obligations.
Finding 7. Guadalupe is losing $4,000 per month in the Solid Waste Fund, due to faulty accounting practices, resulting in a $240,100 fund deficit as of August 18, 2014.
Finding 8. Guadalupe has, for over 12 years, charged up to 193 percent of overhead expenses through inappropriate inter fund transfers from its special funds and enterprise funds to the General Fund.
Finding 9. Guadalupe’s inappropriate transfers included money taken from the State Gas Tax Fund, which was used for purposes expressly forbidden in the Gas Tax regulations.
Finding 10. Guadalupe did not, until recently, follow rules that allow loans of funds from special funds to help finance General Fund activities which must be approved by the City Council, be documented, and include a repayment schedule.
Finding 11. Guadalupe has a large tax liability to the IRS, which started in 2006 as a relatively minor dollar figure, but over the past eight years, with penalties and interest, has grown to over $486,000,
Finding 12. Guadalupe’s decades long hope and expectation that future housing and commercial development will improve its financial situation have not been realized.
Finding 13. Disincorporation will freeze the existing debt of the City of Guadalupe at the current level.

Recommendation: That the City of Guadalupe disincorporate.
.
REQUEST FOR RESPONSE
Pursuant to California Penal Code Section 933 and 933.05, the Jury requests each entity or individual named below to respond to the enumerated findings and recommendations within the specified statutory time limit.

Municipal Bankruptcy & Alternatives for Distressed Cities

eBlog

April 15, 2015
Visit the project blog: The Municipal Sustainability Project

Fire in the Hole. The union representing San Bernardino’s firefighters has sued the city in a pair of lawsuits, alleging city officials are violating San Bernardino’s charter in an ongoing pay dispute. The union had so threatened last October in the wake of San Bernardino’s imposition of changes in their public pensions—a critical issue the city has to address as part of any plan to exit municipal bankruptcy—but where its ability to do so has been threatened not only by the legal objections, but also by charter requirements that make San Bernardino the only city in the State of California which must base its police and firefighter pay on the average of 10 similarly sized cities (all, however, larger in this instance)—a mandate or requirement, nevertheless, which a majority of the city’s voters, last November, rejected the opportunity to change, when they voted by a 55% majority to reject a change which has left the city as the only one in the state to set police and firefighter salaries by comparison with other cities, rather than by collective bargaining. At the time, the Mayor had urged voters to adopt the new measure, arguing that the bankrupt city could ill afford to pay wages dictated by the wealthier cities that are used to setting police and firefighter pay under Charter Section 186. San Bernardino’s fire union chief, in a press release, noted: “We want to stop these violations and ensure that city leaders follow the laws that they have pledged to uphold.” In the suits, filed late last week in U.S. Bankruptcy Court in Riverside, the union asks the federal court to roll back last fall’s changes. San Bernardino City Manager Allen Parker noted, referring to the fire union: “They threatened to do this, and it was just a matter of time…They have been unhappy with the rulings of the bankruptcy court all along, and the bankruptcy court judge is the one who approved the action, so they ought to be angry with the judge, not us.” The intriguing intergovernmental clash before the U.S. Bankruptcy Court, following in the wake of Judge Meredith Jury’s ruling last September that San Bernardino could reject its then-existing contract with the firefighters—but not granting the city’s request that it be granted the authority to impose its own contract—has created a kind of legal limbo. Only, this time, the legal limbo and suit add still another legal hurdle to the city’s ability to cobble together its plan of adjustment to meet U.S. Bankruptcy Judge Meredith Jury’s May 30th deadline to submit its plan of debt adjustment.

Chapter 9 Municipal Bankruptcy & Alternatives for Distressed Municipalities & States. In an unprecedented session hosted by the New York Federal Reserve yesterday, and co-hosted by the Volcker Alliance and the George Mason Center for State & Local Leadership, the three U.S. Bankruptcy Judges of the largest municipal bankruptcies in U.S. history spoke of the lessons learned from Detroit, Stockton, and Jefferson County: with Judges Steven Rhodes (Detroit) and Christopher Klein (Stockton) noting the critical appointment of the “right” mediator, Judge Rhodes driving home the importance of what he termed “pedal to the metal,” and noting that an ‘adversarial process will not work,’ so that the appointment of a “feasibility” expert was invaluable. With Judge Klein noting the “dynamic” nature of municipal bankruptcy resolution, Judge Thomas Bennett, who oversaw the Jefferson County bankruptcy, spoke of the importance of “long-term municipal sustainability” as a key outcome of any successful municipal distress outcome—in addition to an effective restructuring of a city or county’s debt. For municipal leaders, Judge Rhodes noted that any such long-term sustainability had led him to abjure Detroit’s citizens to “remember your anger,” as we discussed the uncertain future of this generation of cities and counties that have—or appear to be en route—to emerging from municipal bankruptcy to what Judge Bennett defined as “long-term sustainability,” a plan which must entail a structuring of a recovering municipality’s pensions and debt service, and which Judge Klein noted might mean there ought to be consideration of some sort of “enforcement mechanism.” Judge Klein, noting that “bond financing is a really good business,” suggested this might be an arena in need of adult supervision, echoing concerns expressed by both the Urban Institute and Judge Bennett (speaking of states which do not give home rule authority to municipalities—a decision, he noted, which precipitated Jefferson County’s historic municipal bankruptcy), and warned could become especially problematical for municipal leaders in ‘no new tax states.’

Municipal DNA. The participants concurred that while there are commonalities or a DNA that connects all municipalities amongst distressed and bankrupt cities and counties; nevertheless, each is unique: in almost every instance, there has been a slow, gradual decades-long demise which begins with the governing body—council or board—based upon financial dealings with labor, developers, financiers—and not with the eyes on long-term fiscal sustainability—or, as one of the experienced federal bankruptcy judges explained it, how, in a triangle of employees, finances, and taxpayers: who has to give up what? –especially, in an era, as Judge Rhodes noted, when the challenge of valuing liabilities of a municipality is its most difficult hurdle with such signal consequences towards a municipality’s long-term fiscal sustainability. The judges emphasized that critical steps required that elected leaders of a bankrupt municipality had to take ownership of a resolution; the value of the adversarial process of municipal bankruptcy; and—in stark contrast with a business, as opposed to municipal corporation bankruptcy; chapter 9 is a “dynamic” process in which the goal is, as Judge Bennett explained, “long-term sustainability,” echoing the guidance of the Boston Federal Reserve’s important paper about the exceptional challenge of state and local leaders “[W]alking a Tightrope: Are U.S. State and Local Governments on a Fiscally Sustainable Path?”

At the session, we were treated to the municipal leadership perspective from the bird’s eye view of Atlantic City Mayor Don Guardian, Syracuse, N.Y. Mayor Stephanie Miner, and former San Jose Mayor Chuck Reed—with Mayor Reed warning of reverse incentives for municipal leaders in the budget process—a process governed by too much secrecy, and Mayor Miner describing the real world consequences that fall on an urban Mayor whose city has already experienced 130 water main breaks so far this year—a year in which the state has continued a long-term process of disinvestment in its municipalities—but her city has seen a 400% increase in its pension and OPEB liabilities—imposing a greater and greater burden on communicating with her constituents, noting: “The truth shall set ye free’”—albeit potentially encumbered by ever increasing legacies of debt. Mayor Guardian spoke eloquently of what it means to be a newly elected Mayor of a city with an 88% reliance on the property tax—but where the assessed value of his city’s properties have declined by 85 percent.

Federal Reserve Bank of New York President and chief executive officer William Dudley opened yesterday’s historic session by warning that municipalities are getting into fiscal trouble by borrowing to cover operating deficits: “When a jurisdiction borrows to invest in infrastructure, the cost of the debt to local residents — and those considering locating in the jurisdiction — is offset by the value of the services that the infrastructure provides. This tradeoff is part of the ‘fiscal surplus’ that a jurisdiction offers: the value of the services minus the tax price that residents have to pay. A well-run capital budget will match these costs and benefits over the life of each project to ensure that the jurisdiction remains attractive to current and future residents.” Nevertheless, Mr. Dudley warned that some municipalities are putting themselves in trouble by borrowing to cover operational deficits and achieve “balanced” budgets, just as New York City did in the 1970’s leading up to its famous fiscal crisis: “The key distinction between these two types of borrowing is that in the former case an asset is producing services that help to offset the cost of the debt, but this is not so in the latter case…Indeed, using debt to finance current operating deficits is equivalent to asking future taxpayers to help finance today’s public services.” Mr. Dudley said that residents of a municipality managing its finances that way could react by leaving, shrinking its tax base and exacerbating its fiscal problems; he directed significant focus to the underfunding of public pensions, a practice which the Securities and Exchange Commission has targeted for enforcement actions, and which regulators and market participants alike have said could be a serious threat to state and local finances and bondholders in the future—noting that the need to compromise with pensioners during Detroit’s recent bankruptcy proceedings, for example, cost the insurers of the city’s bonds millions of dollars—and, warning participants that the Motor City’s experience, as well as that of Stockton, Ca., could be emblematic of more systemic problems: “While these particular bankruptcy filings have captured a considerable amount of attention, and rightly so, they may foreshadow more widespread problems than what might be implied by current bond ratings…We need to focus our attention today on addressing the underlying issues before any problems grow to the point where bankruptcy becomes the only viable option: state and local governments have enormous financial obligations, as well as critical service delivery responsibilities. Managing their liabilities in such a way as to ensure that these vital services continue to be provided, and citizens’ view[s] that they are getting appropriate value in exchange for their taxes is a daunting challenge.”

Gambling on Atlantic City’s Future

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April Fool’s Day, 2015

Visit the project blog: The Municipal Sustainability Project

Gambling on Atlantic City’s Future. Ted Molin, a senior credit analyst at Wilmington Trust Co. in Delaware, yesterday warned that Atlantic City’s fiscal crisis may prompt New Jersey to depart from its historic practice of supporting local-government finances. The warning, which came as the city’s state emergency-management team hired by Governor Chris Christie is considering deferring municipal bond payments as part of an effort to address the city’s fiscal plight; but, Mr. Molin notes, asking bondholders to accept less than what they are owed by the municipality would undermine New Jersey’s reputation for nurturing distressed cities: “We’ve always taken comfort in the strong state oversight of local governments…I was hoping that Atlantic City’s situation was so dire and unique, and it doesn’t necessarily represent a policy change, but I’m starting to have my doubts.” The question about the state role and its possible change would not, after all, only impact Atlantic City. As we have already noted, the tremors there have increased borrowing rates for other New Jersey municipalities already—or, as the insightful fabulous Matt Fabian of Municipal Market Advisors puts it, there could be contagion looming: “For cities with even a chance of distress, you have to assume the state would pursue bondholder losses.” Moody’s has already placed seven other New Jersey cities on review for a ratings cut, saying the Governor’s appointment of the emergency manager for Atlantic City “may demonstrate a limit to the state’s willingness to provide emergency financial support to other municipalities.” Moreover, the Moody analysis added that New Jersey’s own “constrained” finances increases the risk of its curbing local aid. (New Jersey has had eight credit-rating downgrades under Gov. Christie amid revenue shortfalls and rising costs for pensions, benefits and debt service.) The yawning Atlantic City fiscal gap, which emergency manager Kevin Lavin reported to be $101 million, means the manager—together with co-governing leader Mayor Don Guardian―will force the divided governance structure to consider the report’s listed potential cuts, including eliminating jobs and renegotiating employee-benefit payments. Mr. Lavin’s plan calls for proposing a restructuring and negotiating with creditors and unions through June 30th. And time will not be a luxury: Moody’s has already warned that debt payments in August and December may be at risk absent quick state action to prop up the city. Nevertheless, Michael Stinson, Atlantic City’s revenue and finance director, said the emergency manager team “should be viewed as a positive” development: “We’re working collaboratively with the state,” he said. “Everybody’s on point that what needs to get done will get done in the time frame that needs to get done.” Mr. Stinson reports Atlantic City plans to sell long-term bonds by May to refinance notes due in August and a state loan due June 30th, noting that the city would still have market access if the team takes actions such as extending debt maturities: “As long as it makes sense, and everybody’s in agreement and it’s not done unilaterally, it could be worked out.” Atlantic City yesterday was granted a 60-day extension on a $40 million state loan that was due today, with Atlantic City Revenue Director Michael Stinson, noting that the city has been working with the state for the last month to seek more time for the loan payment. New Jersey had provided Atlantic City with the $40 million emergency loan after the city delayed a $140 million bond issue last November. Mr. Stinson noted that the extension marked a “first step,” and that it would be helpful in the city’s ability to “move forward.” Paul Brennan, a money manager in Chicago at Nuveen Asset Management, said he expects insurance to cover any debt-service shortfalls in Atlantic City―but the odds are not quite so rosy for most Atlantic City investors: about 58 percent of the city’s municipal debt carries no insurance, according to data compiled by Bloomberg. That is, in rolling the die, the city is caught between a rock and a hard place—or, as Dan Solender, who helps manage $17 billion as director of municipal securities at Lord Abbett & Co. in Jersey City puts it: “Why would you lend them money if they’re already cutting the payments to existing lenders?”

Where is the State? New Jersey Senate President Steve Sweeney yesterday called on Governor Chris Christie to put an end to the uncertainty on his legislative plan to help end Atlantic City’s ongoing fiscal crisis and to take a clear and definitive stand in support of the bills before the financial distress grows worse and further undermines the stability of other cities: “The absence of the Governor’s support has allowed the fiscal crisis to grow worse for Atlantic City and to threaten the financial stability of other cities…The uncertainty and doubt by the administration is fueling the fires of instability. The Governor needs to take a stand or the situation will only get worse.” Sen. Sweeney is insisting that Gov. Christie voice support for a package of bills to aid Atlantic City and its casinos before they can be voted upon. The Senator hand-delivered copies of the bills — which still have not received final votes in the Legislature — to Gov. Christie’s office yesterday, afterward telling the Associated Press he will not post them for final votes unless Gov. Christie indicates support, saying that emergency managers appointed by the governor have spooked Wall Street and led to costly credit downgrades for Atlantic City, adding that the Governor’s failure to publicly support the legislative recovery plan has added to the instability: “Sending him legislation absent his support would send another destabilizing message to Wall Street, which would make the situation even worse.” Senate President Sweeney added that, from his perspective, the appointment of the bankruptcy managers and the subsequent issuance of their report made the situation worse by lowering the credit rating for Atlantic City below junk bond status and undermining the finances for seven other cities in New Jersey. The recovery plan, sponsored by Senators Sweeney and Sen. Jim Whelan, he believes would bring economic stability to Atlantic City and its casinos and enable the city to take advantage of its potential for economic growth, including a financially-healthy gaming industry.

New Jersey League of Municipalities President, Mayor Brian Wahler of Piscataway, yesterday was succinct: “What happens in Vegas, stays in Vegas. But what happens in Atlantic City has repercussions that will be felt throughout the State…We take great pride, and our municipalities benefit from the fact, that the State of New Jersey has a strong tradition of working with local elected leadership in severely distressed municipalities, to help them honor their obligations without resorting to, or even considering, as an option, municipal bankruptcy. In response to concerns raised in the bond markets by the Detroit bankruptcy, State officials have repeatedly reasserted this commitment, over the past two years. That commitment had strengthened the overall view of the rating agencies of the credit-worthiness of local governments throughout New Jersey. Given the State’s past record of careful and prudent intervention in severely troubled municipalities, we remain hopeful that responsible actions will be taken by State policy makers to relieve the pressures currently threatening Atlantic City and to reassure the bond ratings agencies of the stability of local finances throughout our State.”

What Happens if Municipal Bankruptcy Does Not Work?

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March 30, 2015
Visit the project blog: The Municipal Sustainability Project

The Prospect of Failure. As the federally imposed deadline for San Bernardino to submit its plan of debt adjustment or bankruptcy exit plan approaches, there is an increasing possibility the city’s auditor will not have all of the city’s financial statements audited. Notwithstanding that, U.S. Bankruptcy Judge Meredith Jury last week noted she would be “shocked” if the consultants the city brought in had not managed to have the city’s finances in order—the way every other city and county in a major municipal bankruptcy has, because reliable financial statements are critical to the kinds of negotiated settlements that characterized other municipal bankruptcies. Nevertheless, the seeming uncertainty with regard to who can really speak for the city—in addition to the lack of reliable financial information, means the risks of non-performance are increasing, albeit, San Bernardino City Attorney Paul Glassman advises the importance of keeping the “the audit in perspective,” noting that “[W]hile the city is working very hard to get its audit done…there is no legal requirement that audit be in place (to submit a Plan of Adjustment).” In fact, as Mr. Glassman has stated, Stockton had two years of unaudited financial statements when it filed its bankruptcy municipal plan of debt adjustment, putting it in a comparable position to San Bernardino if it missed both its audit targets, which he does not anticipate. He added that in the Vallejo and Detroit municipal bankruptcies, both were also behind. Ergo, Mr. Glassman believes there is little question but what the city will timely meet Judge Jury’s deadline. It is possible that the more serious problem relates to governance, or, as Counselor Glassman said before Judge Jury: “First of all, in mediation, I have gotten to know and worked with the mayor, city manager, city attorney―all smart, competent, well-intentioned people. And I say that without qualification…However, as a group, working with the City Council, we have a very ineffective form of governance and (lack of a) collective approach…We can’t say in depth what’s going on…and that’s part of the problem.”

Disparate Treatment. At the federal bankruptcy hearing, Mr. Glassman also provided further details with regard to an “interim agreement” between the city and the California Public Employees’ Retirement System (CalPERS), an agreement first announced last June, with greater details provided to the U.S. Bankruptcy Court last November with regard to the $13.5 million in payments the city owed to CalPERS in the wake of the city’s halt of pension payments for the first year of its bankruptcy. Under the agreement, the city first paid $1.5 million in last May, after which it agreed to make equal monthly payments of just over $600,000 per month for two years until the missed total and interest were repaid. Mr. Glassman told the court that under the city’s agreement with CalPERS, the state public pension agency had committed it would not pursue its challenge of the city’s eligibility for bankruptcy protection. Although, Mr. Glassman told Judge Jury, other creditors have characterized the city’s agreement with CalPERS as a “surrender” to CalPERS, he stated it was necessary to avoid having CalPERS reduce the benefits paid to current and future retirees and to avoid an “exodus” of employees that would leave the city unable to serve its residents.

Is There a Jewel in the Crown? What if the San Bernardino Fails to Meet Judge Jury’s Deadline? With the ongoing governance turbulence and uncertainty in San Bernardino with regard to whether the city can get its act together—and the very real apprehension that should it not, Judge Jury may not grant an extension: what will happen? Should the city fail and be denied an extension, the city’s federally granted protection from its creditors will expire—likely leading to a race to the courthouse by those creditors to secure default judgments against the municipality for failure to pay its obligations. The race will be serious, because all creditors understand the city has far fewer assets than claims against such assets. Moreover, the city’s former redevelopment assets are not part of the city budget, so they are already off limits: they have to be liquidated through other means with the bulk of the assets reverting to the state―some nearly $500 million dollars according to the State Treasurer’s Office. Virtually every other asset in the city is fully encumbered: San Bernardino City Hall is not only currently assessed at less than what is owed on the current notes, but it is sinking in additional debt: San Bernardino refinanced the edifice in the 1990’s, and then was confronted with mandated earthquake retrofits of nearly $20 million in additional debt: the architectural design for City Hall was banned in California in the wake of the 1972 Santa Ana Earthquake. The city does have two assets that would be on creditors’ hit lists: the Trash Department and the City’s Water Department: each could be worth in excess of $200 million if the perpetual water rights and potential operating profits were counted. There are estimates that the value of the city trash fleet is in the range of $25 to $35 million dollars, and that operation of the service could be exceptionally profitable if privatized. But the biggest jewel in the crown, as it were, would likely be the municipality’s water rights and water department. The city owns most of the water rights in the basin over which it is built: it is residents’ primary source of water—and with California in an ongoing drought situation, water is the city’s jewel in its crown: one creditor likened the value of the water service to be astronomical.

Gambling on Atlantic City’s Future. New Jersey State Senate President Stephen Sweeney (D-Gloucester), in the wake of state-appointed emergency manager Kevin Lavin’s report last week on Atlantic City, said the emergency financial managers were only making things worse, giving Wall Street a crisis of faith. Sen. Sweeney warned that any further ratings decline on Atlantic City’s debt “would make it even harder for the city to work its way out of its dire fiscal problems.” He complained that the Christie administration was warned months ago that decisive action was needed to stabilize Atlantic City’s finances and re-position the casino industry, adding: “They have held three summits and issued three reports, but they have done little to nothing to restore financial stability, protect local taxpayers, maintain public services, or to give the gaming industry the ability to rebuild its business opportunities: They seem to want to keep playing a losing hand.” Joseph Seneca, an economist at Rutgers University, noted that the reaction to the report from credit rating agencies should come as no surprise: “These are realistic assessments of the depth of the fiscal problems that has built over a period of time. The decline property tax base loss is just staggering…There’s fundamental erosion in the fiscal capacity of the city and that’s the reality…The fiscal realities here and now though are pretty dire: The drop of more than 50 percent drop in the tax base is stunning. It has to have deep and significant financial implications.” Perhaps the greatest concern is over time: Moody’s has warned that the state plan also relied on quick state legislative action, state aid, and timely property tax payments from already struggling casinos―an unlikely scenario as both the Revel and Trump Taj Mahal were delinquent on their property tax payments in 2014. As Moody’s succinctly put it: “Given the city’s cash flow projections and assuming pension and health benefit payments are delayed or deferred, the state legislature will have only three months to adopt the two bills before the city reaches a liquidity and debt service crisis…Debt service payments due on August 1 and December 15 may be at risk if the two bills are not adopted swiftly and the revenue infusion does not come in time.”