Complexities of Democracy & Municipal Bankruptcy

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October 29, 2015. Share on Twitter

Complexities of Democracy & Municipal Bankruptcy. With election day just around the corner, San Bernardino Mayor Carey Davis spent an evening with constituents answering questions, including the inevitable ones about the status of the municipality’s 2012 municipal bankruptcy filing—where the city’s plan of adjustment has long since missed the deadline for submission set by U.S. Bankruptcy Judge Meredith Jury—and where, of course, next week’s election, if there are changes, could create still further disruption. Indeed, Mayor Davis admitted, in response to several residents’ questions, that San Bernardino is not there yet and confronts hard choices in putting together making further “haircuts” before its plan will be ready. Speaking to about 30 residents at Jovi’s Diner for his second “Evening with the Mayor,” he offered updates on key issues—and sought input. He discussed what he termed “seven strategies” the city had identified over the course of five strategic planning sessions or community meetings the city’s leaders had convened with citizens earlier this year, in an effort, he said, to demonstrate the impact community input can have, noting: “As a result of that process, public safety is a top priority of the recovery plan,” noting the city has hired more police, created a park ranger program, and used federal grants to purchase police body cameras and new patrol cars. (See: http://www.city-data.com/crime/crime-San-Bernardino-California.html). Nevertheless, as can be discerned from the data, the challenge of public safety remains, as the Mayor noted, an issue: “Our police are very engaged in trying to eradicate some of the problems in our community, but they’re overwhelmed at times with the heavy call volume.” On the related public safety front, Mayor Davis said the city was continuing in its efforts to outsource or regionalize emergency fire and rescue services with surrounding San Bernardino County, noting: “We’re working through the hoops and hurdles, but we hope to have that done probably by July of next year.” One of the hurdles has been the legal and political challenge by the fire union—a challenge with which Judge Jury has previously concurred with San Bernardino’s fire union was done without required negotiation. Nevertheless, the city and the Local Agency Formation Commission for San Bernardino County, the commission which is in charge of approving San Bernardino’s efforts to annex itself into the San Bernardino County Fire Protection District voted unanimously last month to make that and two related applications its top priority—a focus meant to ensure the annexation process can be completed by next July 1st for the applicants, which include San Bernardino, the Twenty-nine Palms Water District, and Hesperia Fire Protection District. Mayor Davis also pointed out other signs of progress, including the San Manuel Gateway College, a project of Loma Linda University Health with an expected 2016 completion date, which the Mayor reports will create career paths for local students while increasing the number of patient visits nearly tenfold from 30,000 to 200,000 per year. He said the city had issued more than 2,000 new business licenses over the last year—and that, for the first time in decades, the San Bernardino City Unified School District had registered higher graduation rates—and that the city’s Middle College High School had ranked ninth among California’s nearly 2,000 schools.

The Human Side of Municipal Bankruptcy. The bankruptcies of Central Falls and Detroit, perhaps more than any others, and the significant human and fiscal costs, appear to have been central to the exceptional efforts Wayne County, the jurisdiction encompassing and surrounding Detroit, has taken to avoid going into municipal bankruptcy—steps including reducing retirement health care benefits and transferring some of its retirees from employer-paid group health care to a system under which they will receive a monthly stipend enabling purchase of a plan on the federal Health Insurance Marketplace or a plan through the insurance company Wayne County has contracted with to manage the day-to-day administration of the stipend program. The seemingly harsh steps came in the wake of the State of Michigan’s declaration of a financial emergency in the county—a declaration short of municipal bankruptcy, but which triggered a consent agreement between Wayne County and the state which gives Wayne County Executive Warren Evans some powers normally made available only to emergency managers. It seems the experience with the largest municipal bankruptcy in American history has yielded some lessons learned which could be valuable to Michigan’s taxpayers, and Wayne County’s future. Nevertheless, there will be costs. That is to write that Wayne County continues to grapple with a recurring budgetary shortfall that stems from the steep, $100 million annual drop in property tax revenues since 2008. Wayne County officials have been able to drop the deficit be nearly half—nearly $30 million from a $52 million structural deficit. For the longer term challenge, the county faces an underfunded pension system, underfunded by $910.5 million, according to its most recent actuarial report—an underfunding which has been bleeding Wayne County’s general fund by about $20 million annually to prevent it from going under. That is, with the unique authority conferred by the state, the County has been acting with conferred state authority to take extraordinary fiscal steps to avert going into municipal bankruptcy—steps under which Mr. Evans last April announced a plan to cut $230 million from the budget over four years, including reducing health care benefits for employees, eliminating health care for future retirees, and restructuring the pension system—with the transition set to begin at the end of next month when the current health care plan ends and the new one takes effect on the first of December. County officials estimate some 4,000 retirees will be eligible. As James Canning, a Wayne County spokesperson noted: “We understand change is never easy…But moving from employer-paid health care to a stipend program was necessary to improve the long-term financial health of the county. We really appreciate our retirees’ understanding as we move through this process.” The plan also means health care benefits for the county’s current retirees will be affected: Wayne County officials switched an employer-paid group health care plan for retirees to giving them a monthly stipend—and has, in an effort to try to help its retirees through the wrenching process—hosted 13 informational meetings for retirees at sites across Metro Detroit in recent weeks, as well as set up an 800-number and a website at http://waynecounty.amwins.com/ to answer retirees’ questions about their health care benefits. Under the plan, Wayne County employees who retired before 2007 and are eligible for Medicare will receive a $130 monthly stipend for themselves and one for eligible spouses. Wayne County employees who retired before 2007 and are not Medicare eligible will receive a monthly stipend based on their household income: e.g., a retiree with a spouse or single dependent and who earns less than $35,000 a year, will receive a $150 monthly stipend; a retiree with a spouse who earns between $35,000 and $65,000 will receive $300 a month. Under the plan, retirees may buy insurance through a broker or an independent agent, or directly from an insurance carrier, or obtain coverage through a spouse’s employer. Prior to this change, as in many cities and counties, retirees paid a minimal amount out of their own pockets for health care. In Wayne County, for instance, most county retirees paid about $90 per month for coverage for themselves, two people or a family with Blue Cross or Health Alliance Plan under last year’s benefits structure, according to the county. Retirees in the supervisory unit paid about $44 a month for single coverage, $104 for two people and $122 for a family. In addition, county retirees paid a yearly deductible of $500 for themselves and $1,000 for a family. Co-pays for doctor’s visits ranged from $30 to 20 percent for general services from in-network health care providers. Under the new change, the county expects to realize savings of nearly $22 million in FY2015-16 alone. According to the County, effective this December 1st, the county will transfer about 4,000 retirees from employer-paid group health insurance to a monthly-stipend system. County employees who retired prior to 2007 and are Medicare-eligible will receive a monthly $130 stipend for themselves and one for spouses, if eligible; employees who retired before 2007 and are not Medicare-eligible will receive a monthly stipend based on their household income. Here is how it will impact county retirees who are not Medicare-eligible:

Single retiree:

■$100 for income less than $30,000
■$200 for income of $30,000-$45,000
■$400 for income $45,000-plus
Retiree and spouse or one dependent
■$150 for income less than $35,000
■$300 for income of $35,000-$65,000
■$750 for income of $65,000-plus
Family
■$150 for income less than $40,000
■$300 for income of $40,000-$55,000
■$400 for income of $55,000-$70,000
■$800 for income of $70,000-plus

Source: Wayne County

Down Under. Rene Vollgraaff and Xola Potelwa, writing for Bloomberg this week, noted that South Africa’s credit rating could drop to junk in “just a matter of time.” Fitch and Moody’s Investors Service, which rate the nation’s debt two steps above sub-investment, are set to bring their assessments in line with S&P’s at the lowest investment-grade level, noting that another step down would start triggering capital outflows. The cost of insuring South Africa’s dollar debt against default for five years has climbed 58 basis points in the past 12 months to 248, compared with the 142 median of five emerging-market economies with similar ratings at Moody’s and Fitch, and 215 for those rated one level lower. Weakening tax revenue is putting pressure on the country’s budget deficit, even as the country is close to a recession and confronting a 25 percent jobless rate. The budget deficit will widen from earlier forecasts, reaching 3.3 percent in the fiscal year through March 2017 and 3.2 percent in the following year. The federal government debt is projected to reach almost 50 percent of GDP this year. Having lived and worked in Africa—and visited Johannesburg last year, this national fiscal challenge, unsurprisingly, led me to apprehension about the fiscal fallout for the nation’s cities. A 2013 study by the South Africa Fiscal and Financial Commission grouped South Africa’s municipalities into three categories: fiscally neutral, fiscal watch, and fiscally distressed, based on short-term and long-term indicators. According to the short-term indicators, fiscally healthy municipalities decreased (from 34 per cent in 2011/12 to 24 per cent in 2012/13), and the number of municipalities in the fiscal watch and fiscally distressed categories increased. However, the long-term analysis revealed that a large percentage of municipalities are fiscally healthy, with the number of fiscal distressed municipalities remaining relatively low. The study recommended the federal government should develop an early warning system, which would detect municipalities heading towards fiscal distress. Once the probability of fiscal stress was detected, further investigation would be needed to identify the underlying root causes and frame appropriate and timely responses.

The question then becomes, what might that mean for South Africa’s cities? It was, after all, just three years ago that some 64 municipalities in that country were named on a list of financially distressed municipalities, where the report noted: “From evidence to date, it is clear that much of local government is indeed in distress, and that this state of affairs has become deeply rooted within our system of governance.” The assessments were designed to ascertain the root causes of distress in many of the country’s 283 municipalities in order to inform a national turn-around strategy for municipalities; they were carried out in all nine of South Africa’s provinces. One key finding was an overall vacancy rate of 12 percent for senior managers in local government, demonstrating the challenge—a challenge not unlike in many cities in the U.S.—of attracting the most competent managers—especially an issue for municipalities in distress, which often lack both the financial wherewithal, not to mention the budget to attract the top talent. Or, as the South African report found, insufficient municipal capacity due to lack of scarce skills, along with poor financial management, corruption, and service delivery delays all combined for disproportionate municipal fiscal instability and unsustainability. The report also found that the disparity in skills was exacerbated by the decline of municipal professional associations and poor linkages between local government and the tertiary education sector: “Functional overreach and complexity are forcing many municipalities into distress mode, exacerbated by the poor leadership and support from other spheres and stakeholders.” The report found that the distressed municipalities lacked financial and human resources to deliver on their mandate and citizens’ expectations. Or, as we wrote then: when we were in Johannesburg, the news reported: “Most people are not entirely clear about what the officials in this amorphous government department do all day long beyond, presumably, going to a great many meetings with various levels of government, chiefs and tribal councils, listening attentively, nodding sympathetically, and then going home to watch TV…but while the man in the pothole street might not be clear about the purpose and day-to-day functioning of cooperative governance…the minister of finance would have been acutely aware of the need to sort out local and provincial government where mayors and MEC’s buy themselves fancy 4X4’s from the public purse (even the provincial ambulance budget, if that’s what it takes), because their administrations either can’t or can’t be bothered to fix their roads….The job of cooperative governance minister might be less glamorous than divvying up the public sector kitty and deciding who gets taxed how much, but it is, in every sense, a real job, just one that hasn’t been done terribly well until now….”

The Desperate Price of Fiscal Unaccountability

October 14, 2015

Municipal 9-1-1. As U.S. District Court Judge Bernard Friedman noted late last month, the importance of Chapter 9 municipal bankruptcy is to ensure “the resources to provide [its] residents with basic police, fire, and emergency medical services that its residents need for their basic health and safety.” It is that very apprehension about such essential, lifesaving services that has been at the heart of the municipal bankruptcy turmoil of Rhode Island’s Coventry Fire District—one of four fire districts in a municipality of 36,000 people—and where each district has its own governing authority—and where, currently, a private ambulance company had been negotiating with local officials to provide “temporary/emergency” coverage in the Coventry Fire District during its fiscal crisis—but has backed out after several of its employees threatened to resign. Kent County Superior Court Judge Brian P. Stern presided last week as the district remains essentially paralyzed—its bank account is frozen; its firefighters have not been paid for about 45 days; and Fire Board Chairman Frank Palin had contacted a private fire service, Coastline, in the event the court orders the board to hire a private ambulance company. Judge Stern has issued a stern [yes, a pun] warning that the Coventry Fire District is approaching a public safety crisis and residents could be without fire protection in the imminent future. The judge issued an order that state emergency and revenue officials be notified that fire and rescue protection might end soon.

Indeed, the district has been in crisis mode for years: In May 2013, Judge Stern had ordered the Central district liquidated after the board and the union representing firefighters failed to reach a contract agreement, directing the board to sell off property and lay off employees to pay off its debts. The board sold off equipment, shrunk staff, and closed three of five fire stations; however, before the job was completed, former Rhode Island Gov. Lincoln Chafee stepped in and appointed the first of two receivers in May of 2014 to reorganize the department, and, if deemed necessary, to take the fire district into chapter 9 municipal bankruptcy—as former Rhode Island Supreme Court Judge Robert Flanders had done after his appointment as a state Receiver with Central Falls or Chocolateville in August, 2011. Ergo, by the New Year, the Governor had named a receiver, Mark Pfeiffer, appointed by Governor Gina Raimondo, directing a municipal bankruptcy reorganization through the state Department of Revenue.

The duration, however, was short-lived: last month, Mr. Pfeiffer and state revenue officials announced they were giving up trying to reorganize in the face of fierce opposition to his proposed plans of seeking chapter 9 bankruptcy for the fire district—fiery opposition from both the town’s elected leaders and fire district’s leaders. That adamant opposition appeared to be inflamed by Mr. Pfeiffer’s proposed five-year plan of debt adjustment’s inclusion of major contract concessions from the firefighters’ union; but also its proposal of tax increases.

Thus, U.S. U.S. Bankruptcy Court Judge Diane Finkle has granted the state’s request to withdraw the Central Coventry Fire District from chapter 9 municipal bankruptcy, effectively restoring control of the district back to the district’s fire board, noting: “Face it, the taxpayers want a different model,” adding it was time for the courts to get out of the way and the parties to resolve their issues through a “political or legislative” process. Judge Finkle’s decision puts control of the fire district back into the hands of its board, some of whom have made no secret that they want more affordable fire protection and rescue services, possibly even using volunteers and private ambulance service. But how to get there is uncertain: the District’s board of directors has just a week left in which to come up with a plan and put it before district voters at an annual budget meeting on Oct. 19th: the board will have to decide if it wants to return to the idea of liquidating the district — as voters in the neighboring Coventry Fire District did recently — or negotiate another contract with local firefighters.

Ergo, with an accumulating debt to Coventry Credit Union of about $465,000, and an accrued deficit of more than $600,000, the fire district is in a fiscal Twilight Zone amid a broader governance question with regard to whether the current system of fire districts ought to be replaced by town-wide fire departments and the elimination of fire districts. Yet, to date, the Coventry Town Council has proved unwilling to become involved in the fire district’s seeming insolvency—notwithstanding its ultimate responsibility for public safety or the town’s citizen, non-binding referendum last June to liquidate the fire district. Indeed, the town’s inaction appeared to provoke, last July, a letter from the Rhode Island Department of Revenue to warn Coventry’s elected leaders, in which the acting Director wrote: “[T]he Department of Revenue is operating under the premise that the Town of Coventry will assume responsibility for the safety and well-being of its residents…We fully expect the town to be taking the necessary steps to ensure that it will be able to provide fire protection services to the area covered by the Coventry Fire District in the event the district suspends its operations.” Noting the state was ready to help under Rhode Island’s Fiscal Stability Act, which makes it clear that “any and all costs incurred pursuant to the state’s involvement under the Fiscal Stability Act become obligations that must be paid by the locality.” In fact, that appears to be part of the hot potato problem: were the town’s fire district to dissolve, the town’s taxpayers would be forced to finance their services.

In this uncertain municipal governance and fiscally distressed environment, the fire district board has one week in which to complete and present a plan to voters about how fire and rescue services will be financed and provided to residents of the district.

In a state half the size of many counties, the multiplicity of governing districts and municipalities raises grave questions of not just fiscal accountability, but also the seemingly intractable nature of the fire district’s own charter—a charter which provides that only fire district voters have the authority to determine whether and how to tax district residents – a power apparently greater than even a state-appointed receiver’s, despite legislation passed last year to clear the way. Indeed, it was just that charter provision which imposed such a wrinkle in Rhode Island’s efforts to step in: U.S. Bankruptcy Court Judge Diane Finkle last July, during a municipal bankruptcy status conference, warned that portions of the state’s proposed five-year plan of debt adjustment would likely need voter approval—especially for the last four years of the plan wherein the plan called for tax increases once the state receiver had stepped aside and decision-making powers reverted to the fire district’s board—one of four in a town of about 35,000—and one where the Coventry Town Council has repeatedly refused to extend any further fiscal assistance to the district which already is in debt to the town for $300,000.

October 1, 2015

The Stress of Dysfunctional Governance in Municipal Bankruptcy. Last week, at a Governing panel I moderated in Washington, D.C., one of the questions I posed had to do with governance in municipal bankruptcy—a question I asked first of Kevyn Orr, the former Emergency Manger who steered Detroit through its long and complex process into and out of municipal bankruptcy: the differences and perspectives with regard to municipal bankruptcies in states which provide that the elected municipal leaders remain, such as in California and Alabama, versus the different laws in states such as Michigan and Rhode Island, where the Governor may opt to bring on a receiver (Rhode Island) or Emergency Manager, such as Gov. Rick Snyder of Michigan did in appointing Mr. Orr. In Central Falls’ municipal bankruptcy, the Governor named former state Supreme Court Judge Robert G. Flanders as Receiver – where, on day one, he ordered the Mayor and Council out of City Hall – and assumed total authority. Similarly, in Michigan, under the state’s law, Gov. Rick Snyder appointed Mr. Orr as the Motor City’s Emergency Manager—whereupon he took full power and authority for governance of the city—immediately upon his appointment. It was only on the respective federal bankruptcy court approvals of the two plans of debt adjustment that elected leaders (newly elected in the case of Central Falls) that governance reverted to those elected by the people. As we have noted, the model wherein a municipality’s elected officials remain in authority can work (please note, however, continuing challenges below in Jefferson County, Alabama), and in Stockton, California. But democracy in a crisis can sometimes be messy. Witness the imbroglio which is occurring in San Bernardino—now the city with the longest period in municipal bankruptcy in U.S. history, where recent events are painting a dismal picture of the city’s ability to operate and govern: there, in a late night and controversial decision, the city’s key consultant—who San Bernardino Sun insightful writer Ryan Hagen describes as “Arguably the only person with direct knowledge of much of the city’s complex redevelopment process,” was removed after serving nine “sometimes-controversial years at City Hall.” The removal of Jim Morris, who had been chief of staff during his father’s, Pat Morris, service as mayor, involved his work as a consultant on the dissolution of the city redevelopment agency: the issue before the Council was whether to extend his contract. Notwithstanding a 4-3 majority supporting a re-up of the contract, and a clear consensus by much of the city’s leadership, City Manager Allen Parker, City Attorney Gary Saenz, and Assemblywoman Cheryl Brown, who believe Mr. Morris was invaluable—Mayor Carey Davis vetoed any extension of his contract—citing concerns with regard to the delay in completing redevelopment tasks, particularly a long-range property management plan which had been projected to be finished last April, but which was not submitted to the Council until five months later. Mayor Davis noted: “If we’re paying for performance, it’s clear that maybe some of the delay was because concentration was taken from the (redevelopment agency) to city items.” According to Mr. Hagen, both messieurs Morris and Parker say the city made a plan which will allow it to meet state-imposed deadlines by moving in other people, with Mr. Parker writing: “Deputy City Manager, Bill Manis, who has been overseeing the team, will move into a more prominent role to continue the RDA dissolution process…Bill comes with extensive RDA experience and will work in tandem with the internal team and consultant, Urban Futures.” Nevertheless, the disruption comes as the city’s municipal bankruptcy creditors are making discovery requests—requests significantly above and beyond the normal obligations of a municipality, and requests which are increasing the workload for an already severely strained staff—a staff, after all, trying to operate and provide essential services, even as it is trying to marshal the resources to complete a plan of debt adjustment to the increasingly impatient U.S. Bankruptcy Judge Meredith Jury. All of this chaos, moreover, comes as voters are set a month from tomorrow to vote in the city’s election.

The Roots of Municipal Bankruptcy. According to the Detroit News, federal officials are investigating state Rep. Alberta Tinsley-Talabi (D-Detroit) who was a member of the Detroit City Council from 1993 to 2009 and served as a Wayne County Commissioner from 1987 to 1990. The investigation involves a bribery and kickback scandal which occurred during her years’ of service both as a Detroit Councilwoman, as well as a Detroit pension fund trustee. The News reports that Rep. Tinsley-Talabi’s nonprofit organization received at least one bribe from a businessman, during the time she was on a Detroit pension fund, and a time when her City Council campaign received thousands of dollars more from businessmen involved in a widespread corruption case, according to federal prosecutors. The allegations involving Rep. Tinsley-Talabi came out yesterday during the sentencing of a businessperson who had paid bribes to several former Detroit officials: no charges have been made yet in the widespread, years’-long federal probe of corruption at the Motor City’s City Hall, albeit there have been 38 convictions related to Detroit’s public pension funds, including former Detroit Mayor Kwame Kilpatrick and former City Council President Monica Conyers. The News also reported that federal court records clarify Rep. Tinsley-Talabi’s alleged involvement in a criminal case—a case which also has ensnared her former chief of staff, George Stanton, who will be sentenced today in federal court after agreeing to a plea bargain with prosecutors under which he agreed to secretly record conversations with Rep. Tinsley-Talabi and others. During her elected service in Detroit, Rep. Tinsley-Talabi, as a city pension trustee, had responsibilities to both oversee and help approve and select investments of said funds. She has founded a nonprofit group, Mack Alive, which serves the east side of Detroit. According to the News, in 2006 and 2007, when a Georgia businessman sought pension fund investments for his firm, Onyx Capital Advisers, and a real estate investment in the Turks and Caicos Islands on behalf of another company, PR Investment Group; the Detroit Police & Fire Pension Board, according to court records. On Dec. 21, 2006, then pension board member Tinsley-Talabi and other pension board members conditionally approved lending $10 million—an approval to which Detroit’s general retirement board approved another $10 million the following month. Now federal prosecutors allege that, within months, then Councilmember Dixon was handing out cash to city officials: “Evidence shows that Dixon gave the following things of value to Detroit and Pontiac pension trustees and staff in order to buy influence,” listing more than $244,000 worth of bribes, including a $1,000 check from Mr. Dixon to Ms. Tinsley-Talabi’s nonprofit on Aug. 22, 2007—perfectly timed just one day after the $1,000 donation. Further, the federal motion notes she introduced a favorable motion just prior to receipt of a $3,400 re-election campaign donation. In 2007, from Mr. Dixon—followed, just six days later by the Police & Fire pension fund’s grant of her request to have $1.15 million wired to Mr. Dixon’s firm, Onyx Capital Advisors. By December, 2007, the charges note Mr. Dixon paid for “City Official B,” referring to former Councilmember Tinsley-Talabi, to travel to the Turks and Caicos Islands—a trip which, the prosecutors note, two months later appeared to have some sway on her fellow pension trustees for a modified investment with PR Investment Group in the Turks and Caicos Islands, according to meeting minutes and court records. Ms. Tinsley-Talabi did not, however, vote on the proposed investment at the February meeting: she had left the pension board in December 2007 — the same month she took the Caribbean trip. The development came as Mr. Dixon yesterday earned a trip not to the Turks and Caicos, but, rather—in return for embezzling some $3.1 million from Detroit and Pontiac public pension funds, free lodging in federal prison for three and a half years for his role in the scandal, with the court finding he had paid $244,500 in bribes to former pension trustees, including the former Detroit City Councilmember and pension Board member—bribes for agreements which ended up losing the three public pension funds their entire investment of $23.8 million, according to the federal prosecutors. In all, Detroit’s pension fund appears to have suffered more than $95 million in a series of corrupt deals awarded to businessmen who bribed city public officials with cash, trips, free drinks, and other valuable items.

Municipal Bankruptcy Ain’t Over Until It’s Over. Jefferson County, Alabama, which—prior to Detroit—emerged from the largest municipal bankruptcy in American history, is finding that approval of its plan of debt adjustment by the U.S. bankruptcy court is not the last full measure: the county and its elected leaders confront a challenge or appeal to its plan of debt adjustment, creating hurdles to the County’s ability to issue municipal bonds. In addition, some restive opponents of the county’s approved plan of debt adjustment are also challenging court validation of a bond refunding—a refunding approved this year by the Alabama legislature—to provide the county with a source of new revenue. Such refunding revenues are needed to replace some 50 percent of the $70 million the County lost when a court struck down its occupational and business tax five years ago—a court decision which triggered the layoff of nearly 1,000 employees and significant cuts in public services. Jefferson County had filed for chapter 9 municipal bankruptcy in the wake of its inability to restructure $3.2 billion in its accumulated sewer debt. Under its court approved plan of debt adjustment, essential public services have been restored—but the county’s ability to issue bonds for key infrastructure investments and rehabilitation has been beset by ongoing legal challenges—or as the Bond Buyer’s inimitable Shelly Sigo writes: “[T]here isn’t funding for pent-up building, road and bridge repairs or improvements,” or County Commission President Jimmie Stephens noted yesterday: “We are getting the job done, but desperately need this revenue to improve the quality of life for our citizens…Our county buildings have deferred maintenance that needs to be addressed.” Notwithstanding, in a brief filed this week by Jefferson County tax assessor Andrew Bennett, state Reps. John Rogers and Mary Moore, and county resident William Muhammad, four of the 13 persons appealing Jefferson County’s plan of debt adjustment, claim Jefferson County’s claims are “belied by substantial fund balances” of $155 million in its FY2014 audit. In response, Commission President Stephens notes: “For anyone to state that the county does not need the funds, simply has not looked at our decaying infrastructure or simply doesn’t care,” with his statement coming as the County is planning its return to the municipal bond market for the first time since its successful exit from bankruptcy—planning to refund up to $595.5 million of warrants backed by a dedicated one-cent sales tax. Such a sale would provide for a refund a portion of the $1.05 billion of limited obligation warrants Jefferson County issued in 2004 and 2005, backed by the same dedicated sales tax—with the plan set so that the county could dedicate the proposed 40-year refunding plan to provide use sales tax proceeds to pay debt service, with excess tax revenues dedicated to Jefferson County’s general fund and unrelated county expenses such as schools, the Birmingham-Jefferson County Transit Authority, and the Birmingham Zoo—a plan authorized by the state legislature and signed by Alabama Governor Robert Bentley—but a plan for which the has filed a suit in Jefferson County Circuit Court in order to validate the refunding warrants and the state legislation—especially in the face of challenges that the law is unconstitutional.

The County’s fiscal challenges already confront legal hurdles from the two cases challenging its successful emergence from municipal bankruptcy—one by Jefferson County resident Keith Shannon, the other by Mssrs. Bennett, Rogers, Moore and Muhammad. In both cases, who argue the state legislation is unconstitutional. In addition, the attorney, financial advisor, and former broker-dealer, behind the challenge has also questioned Jefferson County’s need for new revenue, claiming if the proposed sales and use tax revenue is needed to fund infrastructure needs now, then the county misrepresented its insolvency before U.S. Bankruptcy Judge Thomas Bennett and its ability to pay the school warrant debt when it filed for bankruptcy, claiming: “The county having…$156 million in excess fund balance to pay school warrants and $155 million in unrestricted cash shows the bankruptcy was filed fraudulently,” he wrote in an email to the Bond Buyer. Ms. Sigo notes:

“Some market experts have suggested that Jefferson County faces a rocky return to the market given political undertones that led to its Chapter 9 bankruptcy, while others have suggested that any future deal might require extra credit support. The school warrants to be refunded later this year were untouched in the county’s bankruptcy. The case appealing the county’s bankruptcy exit involves only the county’s sewer debt. That case is continuing to move through the briefing stage before the 11th Circuit Court of Appeals in Atlanta. Jefferson County has asked the appellate panel to overturn a lower court judge’s ruling, which could result in revocation of a key credit factor supporting $1.8 billion in sewer refunding warrants the county issued in 2013 to write down $1.4 billion in related debt. The county’s reorganization plan authorizes the bankruptcy court to retain jurisdiction over the 40 years that the sewer warrants remain outstanding to ensure that the county provides adequate funds to pay debt service.”

September 30, 2015

The Stress of Democracy & Governance—and the Recurring Sins of the Past. Municipal bankruptcy and oncoming municipal elections make for governance challenges and hard votes. So it is that the San Bernardino City Council—by a one vote majority—passed a sewer rate increase (residents’ monthly sewer bills will rise $7.15 a month, starting in October–and increase more in future years). The narrow margin—a vote despite strong citizen opposition, swill trigger water and sewer collection fee increases, the first since 2010, which the department reported are necessary to avoid a sewer disaster in a system where holes have already been found and remain unfixed — and that is with only 20 percent to 40 percent of the 500 miles of pipes inspected. As the municipality’s water and sewer officials testified, the increase is critical, because the city’s “tires” could blow at any time, and replacing them after a blowout would only be more expensive. Moreover, as City Attorney Gary Saenz warned the elected leaders, not protecting and maintaining the system as required could lead to their prosecution and potential incarceration. Unsurprisingly, with elections looming now in less than five weeks, a stream of city residents (voters) urged the Council to reject the increase, claiming the rate increase was too much—and based on too little evidence. The ensuing 4-3 vote, nevertheless, means that the city’s sewer collection fee will rise about from $4 to $9 a month beginning tomorrow, then in July of every year until 2020, when sewer collection fees will total $11.47 for a single-family residence. The sewage-treatment fee, meanwhile, will rise 11.6 percent, to $20.65, effective tomorrow. By 2020, the total fee for single-family residences’ sewer collection and sewer treatment combined is projected to increase more than 50 percent from $22.50 to $35.32 a month. In adjusting the rates, the bankrupt city is restricted by California law, Proposition 218, which bars a municipality for setting or imposing fees higher than the cost of providing the service and restricts the revenues to a segregated account so that they may only be expended for related services. Notwithstanding the California law, prior to the city’s filing for chapter 9 municipal bankruptcy three years’ ago; in the lead-up to its 2012 municipal bankruptcy filing — San Bernardino officials who are now out of office did provided explicit details on the falsification of municipal budget documents—an admission which, at the time, led the then City Council members to delay a vote on whether to declare a state of fiscal emergency. (In California, a city must declare a state of fiscal emergency – the inability to pay its bills within 60 days without bankruptcy protection – to avoid mediation and other steps which would otherwise be required under state law.) That 11th hour admission—an admission which appeared to indicate criminal misconduct, and clearly triggered a need to consult with constituents, ended up forcing a delay in the city’s decisions with regard to the declaration of fiscal emergency and a resolution formally directing staff to file for Chapter 9 municipal bankruptcy—an admission and action coming in the wake of the City Attorney’s warning that 13 of 16 years of budget documents were falsified—falsifications which officials believed was related to the borrowing from restricted funds – funds specifically legally restricted only for certain purposes – in order to meet payroll and other expenses during months when cash was short. Such undercover borrowings were then repaid as the revenues flowed in later in the year. The city finance skullduggery, combined with a failure to produce city audits for fiscal years 2012-13 or 2013-14, audits which are way overdue but expected, perhaps as early as October, understandably raised hackles—or, as Councilmember Henry Nickel put it, in opposing the rate increase: “If you have money meant for tires and spend it on something else, that’s malfeasance…Until we have the audits in place, you do not have my support. We need to make sure we don’t re-enact sins of the past.” Unsurprisingly, with Councilmembers increasingly focused on next month’s election, supporters of the rate increase accused opponents of demagoguery, or, as Councilmember James Mulvihill, one of the two current Councilmembers on the ballot in November, put it: “Watch out for the politician that wants to manipulate your emotion and not solve the problem you’ll have, anyway,” said. Fellow Councilmember Nickel, the only other incumbent on November’s ballot, opposed the request.

Water and sewer issues—as we have observed in the nation’s two largest municipal bankruptcies—Detroit and Jefferson County—are critical pieces of the puzzle—or, in this instance, as former San Bernardino Councilmember Susan Longville warned prior to the vote: “You have an infrastructure nightmare waiting to happen,” albeit she said, any increase should come after a presentation that more effectively demonstrated the need for an increase.

Mixing Governance & Business. Serving as a municipal elected leader is a thankless task and never-ending challenge. It is a grave responsibility. The scrutiny of television and other media can only increase that pressure—especially if your city or county is confronting a crisis. That is a time when total focus would seem to be a prerequisite. Nonetheless, even as a citizen committee explained its recommended changes Monday to San Bernardino’s city charter during a City Council meeting, Councilman Benito Barrios was elsewhere: he was on the dais, but also on Facebook: he was trying to sell his friend’s gun—an effort which, unsurprisingly, within an hour, meant his efforts screenshots were being tweeted and shared in Facebook groups across the city—or as one constituent put it: “I guess his ward isn’t as important as that firearm and said friend.” While questions arose with regard to the legality of the gun sale (unclear), perhaps the more stressing issue related to focus—or, as the Councilmember stated: “This was during the presentations being given. So it took me 30, 40 seconds in between presentations…The perception is very bad for the people, and I’m aware of that. It’ll probably never happen again.” The occurrence, as former San Bernardino County Supervisor, and San Bernardino Councilmember Neil Derry told the San Bernardino Sun is about “multitasking: Intelligent people do it all the time. It’s a requirement for Marines.”

Rising Tide? Michigan Gov. Rick Snyder this week unveiled a new program, Rising Tide, intended to offer state-based mentoring for local officials of 10 struggling municipalities. The pilot, which the state calls Rising Tide, proposes no fiscal assistance; rather, it is designed so that Michigan economic development officials will work with 10 towns to help local leaders understand and create fiscal and economic development tools and strategies to attract and create new jobs—or, as Gov. Snyder stated: “We can collaborate with communities to help develop the tools to advance a strong economic vision and create new career opportunities for residents…This program will help economically challenged communities be better positioned for redevelopment opportunities.” The Governor announced the new initiative at a visit to River Rouge, a fiscally challenged Detroit suburb of less than 3,000 families—where the median age in the 2000 census was 33 years—and where, according to the most recent Census data, the median income for a household in the city was $29,214, and the median income for a family was $33,875. About 19.1% of families and 22.0% of the population were below the federal poverty level, including 30.6% of those under age 18 and 10.5% of those age 65 or over. The program will be led by the Michigan Department of Talent and Economic Development. State officials will offer mentoring help to local officials in struggling communities, and also outline common economic development tools to create jobs. The Governor’s office selected the municipalities based on unemployment rates, poverty levels and labor participation rate.

The Hard Road Down. In the wake of rating agency Moody’s downgrade of Ferguson, Missouri’s general obligation bonds or debt seven notches to Ba1—a steep drop which Moody’s attributed to not only Ferguson’s deteriorating fiscal situation, but also to apprehensions over the small municipality’s pending lawsuits and oncoming consent decree—a consent decree which will be based upon the federal investigation of police tactics and the city’s municipal budget reliance on traffic court fines—the municipality reacted with its own fire, moodily accusing Moody’s of being unwilling to give it more time to provide information that would offer a fuller picture. When a municipality is confronted by serious fiscal stress, a downgrading renders its ability to borrow both more difficult—and more expensive: precisely the opposite of what might be seen as a prerequisite for meaningful opportunity to recover. Moody’s, in its downgrading, however, noting that Ferguson’s fiscal reserves are shrinking—wrote that the municipality could be insolvent as early as 2017, citing city documents, noting, ergo, that its downgrade reflected “severe and rapid deterioration of the city’s financial position, possible depletion of fund balances in the near term, and limited options for restoring fiscal stability.” Missouri law provides that any municipality or subdivision may file for chapter 9 municipal bankruptcy (six cities have so filed—as well as one school district and one special district). Moody’s wrote. In its response, the small city—already besieged by extraordinary challenges—noted that in the midst of all the urgent demands, it had been unable to meet the severe timeline mandate imposed by Moody’s in which to respond with all the information requested, noting: “As a result, the city believes that Moody’s report is incomplete and fails to provide true transparency associated with Ferguson’s finances.” The municipality further noted it is still in the process of tabulating FY2015 revenues and preparing plans to address revenues and expenses—even as it confronts staffing constraints due to ongoing negotiations with federal Justice Department officials. Nevertheless, Moody’s downgrade will have adverse consequences: the downgrade will affect Ferguson’s $6.7 million of outstanding GO bonds, $8.4 million of certificates of participation from a 2013 issue, and $1.5 million of 2012 certificates.

No Consideration of Bankruptcy. The seeming outcome of a hearing convened by U.S. Senate Finance Committee Chairman Orrin Hatch (R-Utah) and Senate Finance Committee Chairman Charles Grassley (R-Iowa) yesterday is that the Senate is unwilling to even consider legislation to permit the U.S. territory to be eligible for chapter 9 municipal bankruptcy. Even while expressing disinterest, they claimed they want more information on Puerto’s Rico’s increasingly severe fiscal crisis—and that of its municipalities—and how to fix them. Instead, Chairman Grassley, whose committee has no jurisdiction over municipal bankruptcy legislation, offered that Congress should consider amending the Jones Act to exempt Puerto Rico from its onerous provisions which have the effect of imposing a tax on the costs of shipping goods from Puerto Rico to the U.S.—a federal law which has discriminated against Puerto Rico’s competiveness in the Caribbean, harming its economy. The Chairman also suggested Congress could reconsider the application of the minimum wage—which is currently 77% of the Puerto Rican median income compared to 28% on the mainland. Finally, mayhap thinking of the important value provided by the creation of financial control boards for both New York City and Washington, D.C., Chairman Grassley told the witnesses that a federal financial control board could be a good alternative. For his part, Chairman Hatch, whose Judiciary Committee has jurisdiction over federal bankruptcy laws, including chapter 9, seemed to defer to perspective of Douglas Holtz-Eakin, president of the American Action Forum, and the former Director of the Congressional Budget Office. Mr. Holtz-Eakin testified: “The primary focus (with regard to Puerto Rico) should be on policies that restore economic growth,” telling the committee that enacting legislation to offer Puerto Rico access to Chapter 9 bankruptcy (he did not address enacting such legislation so that—as under current federal law—Puerto Rico could authorize its municipalities access to municipal bankruptcy). But he also testified that the Puerto Rican government needs to provide Congress with better financial documents, noting that the commonwealth’s lack of “high quality” documents is “one of the very troubling aspects of this situation:” “debt sustainability analysis” needs to be done for Puerto Rico. Thus, he opined, that to authorize Puerto Rico access to municipal bankruptcy could do more harm than good, because, he testified, it would lead to one-sided “haircuts” on the residents who currently own about 30% of Puerto Rico’s municipal bonds; he added, however, that giving the U.S. territory access to municipal bankruptcy protection be warranted “somewhere down the road,” but not now. For his part, Ranking Member Sen. Chuck Schumer (D-N.Y.) advised that he intends to urge that Chairman Grassley hold hearings on the municipal bankruptcy bill which would alter Puerto Rico’s status. In their testimony, Resident Commissioner Pedro Pierluisi (D-P.R.) and Government Development Bank of Puerto Rico president Melba Acosta each told the two committees Puerto Rico needs access to municipal bankruptcy protection to put a halt on the increasingly rapid depletion of revenues—so that the leaders have more time to negotiate on its debts—a chapter 9 filing, once accepted by a U.S. bankruptcy court, immediately freezes obligations to debtors, and initiates a process overseen by a federal bankruptcy court to work out a plan of debt adjustment with all its creditors—even as it guarantees there is no interruption of the provision of essential public services. The pair warned that, absent such protection, projections point to Puerto Rico running out of money near the end of the year, and adding: “The unavailability of any feasible legislative option to adjust debts has created an overall environment of uncertainty that makes it more difficult to address Puerto Rico’s fiscal challenges and further threatens Puerto Rico’s economic future.”

Municipal Default & Consequences

August 6, 2015

Default & Its Consequences. Puerto Rico is in uncharted fiscal and physical territory in the wake of its default, and now faces a severe physical and fiscal drought. Lacking the protections to ensure the ability to provide essential public services under municipal bankruptcy, the drought threatens to syphon off already insufficient resources—almost certainly forcing further defaults—a fiscal situation which will make the island’s cost of borrowing increasingly prohibitive. Put another way, further credit downgrades could pose a serious challenge to Puerto Rico’s post-crisis recovery. With nearly 13 percent of the island under an extreme drought, the U.S. territory’s public utility will be providing water only every third day, raising the total facing 48-hour cuts in service to 400,000, as Puerto Rico’s main reservoirs continue to shrink, according to the island’s water and sewer company. Last month was the fourth-driest month on record in San Juan since 1898. Now the drought has forced some businesses in Puerto Rico to temporarily close—closures which will further erode critical tax revenues, including recently increased sales and use tax revenues. But the island’s travails will have widespread fiscal reverberations: if Puerto Rico fails to make interest payments on its $72 billion public debt, pension funds across the U.S. could find themselves unable to meet their own payment obligations. Thus, even as Congress has slipped out of town without any consideration of what threatens to become a much more national financial crisis, tens of thousands of Americans in Puerto Rico are facing an immediate issue—one with potential serious health and safety consequences—and one which even a simple debt restructuring, were Puerto Rico’s bondholders to agree to it — would not resolve the fiscal and increasingly physical challenge. Absent some intervention, the U.S. territory, with a population of 3.6 million, assumes that each and every person on the island would need to pay $1,400 a year — 9 percent of Puerto Rico’s per-capita income — just to cover this year’s $5 billion principal and interest payments on the debt.

Advice and Consent. Wayne County Executive Warren Evans told his fellow commissioners yesterday that agreeing to a consent agreement is Wayne County’s only option for resolving its financial emergency: “It’s the only rational option…It keeps power in the county’s hands.” Mr. Evans’ remarks came as he and his colleagues must opt for one of four options under Michigan law: a consent agreement, mediation, appointment of an emergency manager, or Chapter 9 municipal bankruptcy. Mr. Evans added, yesterday, that Michigan State Treasurer Nick Khouri had told him earlier in the day that the county could be released from a consent agreement as early as next April. Commissioner Burton Leland, D-Detroit, said the panel’s realistic choices are limited. “There are really only a couple of options,” he said. “Bankruptcy and emergency manager aren’t really options.” Commissioners have until 5 p.m. today to make their decision—with the most radical to, in effect, remove themselves and hand over power and governance authority to an unelected emergency manager. For his part, the County Executive made clear he would prefer a consent agreement: such an agreement, he said, would spell out specific budgetary reforms the county would have to meet, adding that power is only a tool—and one he would not necessarily need to use if cost-saving contracts with Wayne County’s labor unions could be negotiated, noting: “I would much rather negotiate contracts with our unions than impose them…Because I have the hammer doesn’t mean I drop it.” Leaders of Wayne County’s public unions asked commissioners to consider how their decision might impact workers before they vote, with Edward McNeil of AFSCME testifying: “You commissioners were asking (Executive Evans) if the consent agreement would take away your power…If you go with a consent agreement, you take away our power to sit down and negotiate (a contract) on equal footing.” The issue confronting the elected leaders is how they can address a $52 million annual structural deficit—a deficit caught between the Scylla of a $100 million drop in annual property tax revenue since 2008 and the Charybdis of the county’s desperately underfunded pension system: Wayne County’s primary pension plan is 45 percent funded and has a liability of $910.5 million, based on the latest actuarial valuation. Officials currently project Wayne County’s deficit could reach $171.4 million by FY2019 absent immediate fiscal steps.

Rolling the Fiscal Dice. Standard & Poor’s Monday cut Atlantic City’s general obligation credit rating three notches to BB, citing uncertainty over whether the fiscally stressed municipality can meet its fiscal obligations this year, with S&P analyst Timothy Little commenting that Atlantic City confronts short-term fiscal risks from the “lack of a clear plan” to plug an estimated 2015 deficit of $101 million, adopting a 2016 fiscal budget and achieving tax collection projections. Mr. Littler noted: “The downgrade reflects continued uncertainty regarding the long-term fiscal stability and recovery of the city as it responds to increasing liabilities from tax appeals and an eroding tax base… [it] reflects our view that the city is more vulnerable to nonpayment since our last review given that three months have passed without additional clarity on how the city will propose to resolve its long-term financial challenges.” The downgrade came as the city—rather than awaiting tonight’s GOP debate—instead is frustrated by the delay in action by Gov. Chris Christie. Atlantic City Revenue Director Michael Stinson made clear that Atlantic City not only has met its August debt payments, but also that he expects a balanced budget to be achieved in early September, provided Gov. Christie signs legislation to implement a state fiscal package which would provide the city with additional revenue. Mr. Stinson added that Atlantic City was successful in selling some $40.5 million in Municipal Qualified Bond Act (MQBA) bonds last May to pay off a state loan and that tourism has been up this summer, noting: “There has been nothing negative happening to the city since we issued those bonds in May…A downgrade at this point is unwarranted.” But S&P’s Little wrote that although Atlantic City was able to address immediate financial and liquidity pressures through the MQBA bonds, the future ability of Atlantic City to the municipal bond market remained more of a gamble, adding that since the release last March of a 60-day report from the city’s emergency manager Kevin Lavin, there has been no clarity on potential payment deferrals. Indeed, on July 1st, Mr. Lavin said that all options are on the table with a potential municipal bankruptcy filing not ruled out—in effect reemphasizing the confused governance situation with regard to his role and relationship with Mayor Don Guardian, leading Mr. Little to note: “The lack of clear and implementable reforms to restore fiscal solvency without payment deferrals or debt restructuring remains uncertain as the city continues to operate in a difficult fiscal environment.”

Is Municipal Bankruptcy a Dirty Word? Moody’s, in a decidedly unmoody examination, today wrote that the nation’s city and county leaders no longer consider municipal bankruptcy to be taboo; rather, they said, fiscally distressed cities and counties in those states which authorize chapter 9 municipal bankruptcy are increasingly likely to consider it a viable option, based upon their examination of recent municipal bankruptcies, adding that “The number of general government bankruptcies following the recession remains low, but is still remarkable compared to the long-term experience of the U.S. municipal market since World War II.” They noted that four of the five largest municipal bankruptcy filings in U.S. history have been made in a little more than three years, a record they attributed to a slow recovery from the Great Recession, but also to changing attitudes about debt. But they also noted that the successful recovery from municipal bankruptcy by municipalities such as Central Falls, Jefferson County, and Detroit—in addition to the willingness of investors to come back to defaulting cities like Wenatchee, Washington could further help change municipal investors’ perceptions with regard to default and bankruptcy: “In the apparent absence of a severe or prolonged capital markets penalty, it is not surprising that various governors, mayors, and other local government officials have come to consider bankruptcy as a potentially realistic and effective option for restructuring liabilities.” The magnificent seven also noted that while these municipal bankruptcies have gained wider acceptance and appear—at least so far—to have worked; they have been less friendly to municipal bondholders, noting especially that pensions have been largely protected, whilst municipal bondholders have taken steep cuts, adding: “A more frequent use of bankruptcy by distressed credits does not in and of itself alter our overall stable outlooks for the state and local government sectors, but it does underscore how the recent recession has resulted in significant pockets of pressure, ongoing challenges of balancing rising fixed costs against anti-tax sentiment and a tighter budgetary ‘new normal’ that is less resistant to new shocks…We expect that bankruptcy and default will remain infrequent among rated local governments and consequently expect no change to our broad distribution of municipal ratings.”

What Is the State Role in Severe Municipal Fiscal Distress?

eBlog

April 22, 2015
Visit the project blog: The Municipal Sustainability Project

Balancing Municipal Sustainability vs. Municipal Bondholders’ Interests. Fitch Ratings is warning that Illinois Gov. Bruce Rauner’s support for making municipal bankruptcy more available to the state’s larger municipalities and school systems might have corrosive impacts on those larger municipalities’ bondholders. In a special report, Fitch warned that recent developments in Illinois and New Jersey could reduce the chances of state intervention—intervention that, according to the rating agency, could result in better outcomes for the respective municipal bondholders than allowing distress to lead to municipal bankruptcy: “We believe efforts to resolve looming budget deficits and ensure the affordability of long-term obligations would be more productive than focusing on easing laws or practices to allow bankruptcy.” The special report comes as Illinois Governor Bruce Rauner has recently proposed amending Illinois laws to grant authority to larger municipalities to file for federal bankruptcy protection, and, because of his growing apprehension about the credit quality of Chicago Public Schools (CPS), Governor Rauner this week said he is apprehensive CPS may need authority to file for bankruptcy as a solution to its large budget imbalance. According to CPS analysis, the system’s reserves will likely be fully depleted by the end of FY2016. (Giving a sense of a system beset by apprehensions with regard to its fiscal solvency and its leadership, the Chicago Board of Education yesterday sold $300 million in municipal bonds with a 25 year maturity—but at a top, prohibitive interest rate of 5.63%–a severe fiscal penalty.)

With regard to New Jersey, the agency noted that the recent appointment of corporate restructuring experts—including Kevyn Orr, who served as the Emergency Manager overseeing Detroit’s largest municipal bankruptcy in U.S. history―to assist Atlantic City in addressing the seaside city’s fiscal crisis appears at odds with New Jersey’s “strong history of aiding local governments to prevent the type of stress that could lead to bankruptcy,” noting: “Of US states, New Jersey has historically provided among the strongest levels of early intervention to local governments with financial strain, [but] recent developments in Illinois and New Jersey are lessening the chances of state intervention that could result in better outcomes for bondholders than allowing distress to lead to bankruptcy…We believe efforts to resolve looming budget deficits and ensure the affordability of long-term obligations would be more productive than focusing on easing laws or practices to allow bankruptcy.” The April 20th Fitch report comes on the heels of Gov. Bruce Rauner’s recent proposal to add a Chapter 9 provision to state statutes as part of his Illinois turnaround agenda—a proposal which has incurred strong opposition in the legislature from unions, who have charged that the Governor is using the threat of municipal bankruptcy to give local governments greater leverage in negotiations on pensions, benefits, and wages. The rating agency noted that the Governor’s apprehensions follow in the wake of the increasingly failing fiscal grades of the Chicago Public Schools district, which has been slammed by a steep credit rating slide as it confronts a $1.1 billion deficit and some $9.5 billion of unfunded pension obligations—and mounting public pension debts for Chicago’s police and fire retirees, where public safety pension payments are set to achieve an unaffordable trajectory next year under a state mandate to stabilize those funds. Fitch’s perspective is that while state fiscal intervention mechanisms vary from state to state, the majority focus on helping local governments recover from distress, rather than preventing it, with authors Managing Director Amy Laskey and Senior Director Rob Rowan noting that restrictions on states’ ability to impact some union collective bargaining agreements, including pension obligations, “limits their ability to remediate financial distress.” The special report appears as the prestigious Chicago Civic Federation is pressing Illinois’ legislature to consider a measure developed by the incomparable municipal restructuring expert Jim Spiotto to create an authority designed to intervene before a government’s fiscal strains reach crisis stage.

The State Role in Municipal Fiscal Distress. In our studies, states have played singularly disparate roles with regard to severe municipal fiscal distress—with the State of Alabama becoming a precipitator of Jefferson County’s then largest municipal bankruptcy in history, California playing an agnostic-to-negative role in its triple set of recent municipal bankruptcies, but both Rhode Island and Michigan evolving into constructive roles—roles which could be significant factors in the long-term fiscal sustainability of post-bankrupt Detroit and Central Falls. New Jersey, however, appears to leaning away from its previous record of strong support. Now Illinois is debating whether it ought to change its role. Part of the issue relates to whether a state does or does not even allow a municipality to file for federal bankruptcy protection (12 states do specifically; 12 do conditionally; three provide limited such authority; two specifically prohibit; and the remainder are silent.). Now as New Jersey and Illinois debate changing their respective state policies and maybe statutes, Fitch Ratings frets that recent developments in the two states are reducing the chances of state intervention to help municipalities in severe fiscal distress, writing that: “We believe efforts to resolve looming budget deficits and ensure the affordability of long-term obligations would be more productive than focusing on easing laws or practices to allow bankruptcy.” The new views come as Illinois Governor Bruce Rauner has recently proposed granting authority to local governments to file for federal municipal bankruptcy protection (current Illinois law bars municipalities with populations over 25,000 from filing a Chapter 9 petition.), and New Jersey continues to debate whether the state ought to force Atlantic City into municipal bankruptcy. In its recent views, Fitch noted it believes the needs of a distressed municipality are a better indication of the possibility of bankruptcy than whether current state law allows it, writing: “In New Jersey, the recent appointment of corporate restructuring experts to assist Atlantic City in resolving the city’s fiscal crisis appears at odds with the state’s strong history of aiding local governments to prevent the type of stress that could lead to bankruptcy. Of U.S. states, New Jersey has historically provided among the strongest levels of early intervention to local governments with financial strain.” With regard to the Windy City, Fitch notes the increasing failing fiscal grade of the credit quality of the Chicago Public Schools (CPS), noting that Governor Rauner this week said that he fears the district may need municipal bankruptcy as a solution to its large budget imbalance, adding that, according to the school system’s own analysis, their reserves will likely be fully depleted by the end of FY2016. The dichotomy Fitch likens almost to a teeter-totter: “Fiscal intervention mechanisms vary by state. Most focus on helping local governments recover from distress, rather than preventing it. Many can approve or reject financial plans, budgets, and certain government contracts under state control. Their powers, however, are constrained by laws governing labor contracts, benefits including pension obligations, and service provision. Fitch believes this limits their ability to remediate financial distress.”

The Challenge of Communicating about Municipal Bankruptcy. In a corporate bankruptcy, the company or corporation usually simply ceases to exist; in a municipal bankruptcy, the municipal corporation seeks federal court protection to ensure its continuity—and, of course, the city remains open and operating. In states which authorize municipalities to file for chapter 9 protection, there are significant variations—with some, such as Michigan and Rhode Island, for instance, authorizing the state to appoint an emergency manager or receiver, an individual who effectively displaces any and all elected officials—and who bears little onus or responsibility to communicate to the city’s citizens. But in others, such as Alabama and California, the elected municipal leaders remain in office—and retain significant responsibilities to communicate to citizens and taxpayers what is happening in or to their city or county—an especially vital role under a federal-state-local situation intended to ensure continuity and the provision of essential public services. Thus, after significant struggle, San Bernardino last evening selected Monica Lagos to serve as the voice of the city. Ms. Lagos, who since last October served as a senior account executive at Westbound Communications, was appointed in the wake of a 6-1 vote, but only after an extended and sometimes heated discussion. Her task is to “tell the city’s story” as it struggles to cobble together its plan of debt adjustment by the end of next month’s federally-set deadline by U.S. Bankruptcy Judge Meredith Jury. As San Bernardino City Manager Allen Parker, in seeking to justify the diversion of virtually non-existent fiscal resources for such a new position, put it to the Mayor and Council before the vote: “Transparency, transparency, transparency…I am looking less at image-making than I am at telling a story that gets us through the bankruptcy.” Prior to the Council’s vote, Ms. Lagos said the specifics of her approach to the city’s municipal bankruptcy would need to be worked out after she was hired: “I think we all know that it’s extremely important for the city, and it’s been a long time coming…Honestly, for me in particular, it’s a position that will help connect each of the departments, help connect what the city’s efforts are currently with the public’s need to know this information.” Prior to the vote, City Attorney Gary Saenz advised the Council that Judge Jury had said it is important for the public to be informed and involved in the city’s Plan of Adjustment, noting: “This is not a plan of adjustment that is just something that happens at City Hall…It’s something we get the whole community engaged in, and they have to be a part of getting San Bernardino out of bankruptcy…It needs to be a consistent message that informs the public exactly where we are, particularly with regard to the bankruptcy.” The lone dissenter, Councilman John Valdivia, said he agreed with residents that the focus should be directly fixing problems in the city rather than “image.”

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.”