The Road to Recovery from Municipal Bankruptcy

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November 12, 2015. Share on Twitter

The Road to Recovery from Municipal Bankruptcy. Jefferson County Commissioner David Carrington has put together a description what he labels “A Post-Bankruptcy Look at Jefferson County, Alabama” for a presentation at a Symposium on Modern Municipal Restructurings for Duke University this week to demonstrate the steps on the road out of what, at the time, was the largest municipal bankruptcy in U.S. history in Alabama’s largest county. Noting the county’s diverse economy, with a GDP ranking it 137th out of 3,134 counties, and its home to the Innovation Depot, the largest business technology incubator in the Southeast, as well as its robust rail and interstate transportation network, he pointed to last year’s 2014 new residential permits (in dollars) greater than 58 of Alabama’s—or some 19.2% of all the state’s 67 counties combined, as well as the balanced budgets the county has adopted each and every year since U.S. Bankruptcy Judge Thomas Bennett approved the municipality’s plan of debt adjustment. He also noted the county’s slimmed payroll: the county today has 1,000 fewer employees than when, 25 months after it emerged from municipal bankruptcy on December 3, 2013, adding the County long-term debt has declined by some $1.5 billion—more than one-third, and that the County has made significant structural changes, including closing an inpatient (not impatient) hospital, sold the nursing home assets, closed all four of its satellite courthouses, and achieved something which must make Chicago Mayor Rahm Emanuel most jealous: a county pension has a funded ratio of 105.6%. He reports that audits, which were three years past due when this Commission took office in 2010, are now actually published ahead of schedule. Mayhap one of the most important accomplishments might be a more constructive relationship with the Alabama Legislature, which has passed a replacement 1‒cent sales tax bill, an action which allows the County to refinance its school construction debt, a key step to providing additional funding for county operations, economic development, schools and community development, in addition to county debt retirement. On the economic recover front, the Commissioner reports that more than 1,300 condominium units are planned or under construction, along with a $30 million mixed use development in Midtown anchored by a 34,000 square foot Publix grocery store—and that new historic building tax credits enacted by the Alabama legislature have elicited more than $200 million in local investments in a metro region now ranked as the Top City for Millennial Entrepreneurs by Thumbtack, in addition to being ranked 6th overall and 5th for economic development potential among the Top 10 mid‒sized North, Central and South American “Cities of the Future.”

A Detroit International 911. Daniel Howes, the gifted Detroit News columnist and associate business editor, wrote a terrific column yesterday about Dovie Maisel, an Israeli architect for a cause called United Hatzalah, a network of trained volunteers in that country which responds to calls for emergency medical care in Israel’s largest cities and across the country — noting that Mr. Maisel is in Detroit as part of an international effort to work with Mayor Mike Duggan to see if the model could be replicated, with Mr. Maisel noting: “We are not coming to take any jobs. We are the community. We are coming to help them:” Detroit and its EMT units are in preliminary discussions with United Hatzalah to see if the Israeli concept, which is scheduled to be launched this month in Jersey City, New Jersey, could also be adapted for the Motor City—an audacious effort which is envisioned to complement, rather than compete with what Mr. Howes describes as Detroit’s “stressed EMT units.” The partnership would train community volunteers. Potentially it would create a cadre of skilled technicians who could apply for EMT openings in Detroit or the metropolitan region—with Mr. Maisel noting, carefully, that Hatzalah volunteers do not replace professional EMT units in Israel; rather, certified according to Israeli national standards, they are, nevertheless, often able to respond to emergencies more quickly, because they are embedded in their communities—so that they are closer. Indeed, the concept has similarities to the remarkable public safety partnership in No. Virginia, where a unique agreement between its local governments ensures that the first 911 response will come from the closest responder—irrespective of jurisdiction—an agreement which can make the difference between life and death—and, secondarily—savings. According to Mr. Maisel, in Israel, volunteers are not paid, and victims are not charged.

As Mr. Howes wrote: “It’s an audacious idea for Detroit, one Mayor Mike Duggan dismissed as fanciful in a city of 139 square miles with a population pushing 700,000 — until he heard the pitch and compared it to the city’s need to improve its response to emergency calls,” noting that in Israel, “a polyglot of ethnicity, religion and intermittent tension effectively bridged by United Hatzalah…a country of less than 8 million, the volunteer organization fields 700 emergency calls a day, carries 3,000 volunteers nationwide, and boasts an average response time of three minutes, even less in more densely populated major cities.” The organization use a fleet of 450 “ambucyles” volunteers use to answer calls, and counts 2,550 volunteer-owned vehicles that are used to augment its rescue fleet, adding: “With a budget of $10 million, all of it privately funded, Hatzalah maintains 40 branches across the country organized into eight districts — its volunteers treat victims regardless of ethnicity, sex or religion, with an ‘ultimate goal to save lives, to take the community and train them at all levels.’” As Mr. Howes writes: “This may be the right cause at the right time for Detroit. It could answer a public need, could ease pressure on EMT units, could teach volunteers from the city’s neighborhoods marketable skills, could tap an entrepreneurial vein in a (Mayor) Duggan administration generally open to alternative solutions, and could be funded by individual private donors and foundations”—especially in a city beset by an emergency response rate being among the lowest in the country. In this fascinating cross border effort, the Detroit Medical Center and Henry Ford Health Systems’ chief of emergency medicine are working with the Mayor’s office to assess the implications of trying to implement this potential international partnership—one which Mr. Howes forthrightly describes as “fraught with legal and medical issues, as well as reassuring union EMTs that the effort is not a back-door gambit to eliminate their jobs.”

Looming Default. The U.S. territory of Puerto Rico could default at the end of the month on at least a portion of its scheduled debt service payments—an event which would constitute its second default, as the island’s liquidity pressures increase: it upcoming fiscal obligations consist primarily of $354.7 million of debt service on notes issued by the Government Development Bank or GDB, which has less incentive to make a payment of $81.4 million in debt service on non-general obligation-backed debt, as the payment pledge does not benefit from constitutional protections. The greater sustainability risk is that the GDB may be forced to default also on the $273.3 million of GDB notes which are backed by Puerto Rico’s full faith and credit general obligation guarantee—a default, after all, which would likely trigger legal action—but an event long foretold: as Puerto Rico, without access to the kind of federal bankruptcy options available to municipalities across the rest of the U.S., but with a seemingly disinterested Congress, will have little option but to not make full faith and credit bond payments that would jeopardize essential government services, consistent with the rapidly approaching reality that “the Commonwealth cannot service all of its debt as currently scheduled.” Puerto Rico’s ability to meet any of its obligations is deteriorating, even as, like Nero, Congress fiddles.

The territory, absent access to external sources of financing, projects a negative $29.8 million cash balance this month, growing to a deficit of $205 million by next month. Even though some recovery is projected in early 2016 with the enactment of emergency liquidity actions, actions which could include utilizing tax revenues currently assigned to one or more government authorities and further delaying tax refunds, Puerto Rico’s November Financial Information and Operating Data cash projection report does not include any availability of funds at the GDB, noting its cash resources “may be fully depleted by the end of calendar year 2015.” Puerto Rico’s inability to sustain sufficient liquidity to meet its operating and debt needs, absent extraordinary measures or outside help or legal recourse, is now expected to lead to additional defaults. Even though, a government aide stated that Puerto Rico will make its scheduled December payment on GO guaranteed GDB debt, such payment will decrease what might be available for an approximately $330 million GO debt service payment due on New Year’s Day: that is, as Bloomberg noted: “While we expect the commonwealth to use all available measures to prevent a default on constitutionally protected debt, it has not been making the monthly sinking fund payments required for the 1 January payment since July 2015. Instead, it will rely on cash on hand in the Treasury’s single cash account to make the debt service payment, though as noted above the projected November and December balances in the fund are negative. The commonwealth is not eligible to file for bankruptcy and the absence of a debt-restructuring framework heightens risks to creditors because it prevents the government from using tools generally available to distressed corporations and some municipalities.” For his part, Puerto Rico Gov. Alejandro García Padilla the day before yesterday warned that if the island’s municipal bondholders do not agree to new terms on their debt, he will choose to pay for the needs of the people before paying the Commonwealth’s creditors: “…if they do not negotiate and force me to choose between creditors and Puerto Ricans, I’m going to pay the Puerto Ricans.’”

Providing Essential Services. Governor Alejandro García Padilla has said he will consider cutting hours for public workers to keep essential governmental services and functions running; he has already closed some schools, delayed tax rebates, and suspended payments to government suppliers. The Obama administration, lacking any constructive Congressional role, has, via the Treasury Department, proposed an assistance package that would sustain the island’s medical system by increasing reimbursement rates for Medicaid, which serves 46 percent of Puerto Ricans and is paid at rates 70 percent lower than in any U.S. state, according to the Puerto Rico Healthcare Crisis Coalition, a group of doctors, hospitals, and insurers. The proposed package would also offer some bankruptcy protections to help the government restructure more than $70 billion in debt—more than any state’s except New York and California. In return, under the proposal, Congress would gain more say over the island’s finances. Congressional leaders, however, report they will not agree to provide either any fiscal assistance—or municipal bankruptcy authority—unless Puerto Rico provides audited financial statements giving a complete picture of its finances, a challenge given that the self-governing U.S. territory missed a self-imposed Oct. 31st deadline for submitting statements from FY2014 and has yet to prepare FY2015 documents. Congress appears to want to impose a different standard than used for states with regard to chapter 9 municipal bankruptcy or other U.S. corporations, with Chairman Charles Grassley (R-Iowa) of the Senate Judiciary Committee claiming he “is waiting for some good-faith effort from Puerto Ricans.”

The Steep Road to Recovery from Municipal Bankruptcy

October 7, 2015

The Hard, but Critical Road to Recovery & Fiscal Sustainability. Few municipalities, especially compared to other corporations, go into bankruptcy. But for those that do, they do not disappear, as is the outcome in many corporate bankruptcies; rather they do not miss a beat with regard to providing essential services, even as they began the long and expensive process of putting Humpty Dumpty back together again by means of assembling a plan of debt adjustment in negotiations with their thousands upon thousands of creditors. While each of those plans must receive approval from a federal bankruptcy court—and the respected and respective judges do look to see that such proposed plans incorporate long-term fiscal sustainability provisions; nevertheless, those municipalities are not starting on a level playing field. So the question with regard to their ability to fully recover remains a story to be learned—because never before in American history has there been such a spate of major municipal bankruptcies. Ergo, unsurprisingly, Detroit—with its plan approved and the Mayor and Council restored to governance authority—in effect starts at a disadvantage compared to other municipalities: its road to climb is steep.

There is good news, however: a new report, “Estimating Home Equity Impacts from Rapid, Targeted Residential Demolition in Detroit, Michigan: Application of a Spatially-Dynamic Data System for Decision Support,” from the Skillman Foundation, Rock Ventures LLC, and Dynamo Metrics has found that the valuations of homes within 500 feet of a demolition funded by the U.S. Department of Treasury’s $100 million in Hardest Hit Funds have increased by an estimated 2.4 percent between December 2014 and May 2015. Indeed, blight removal has been a core element of any route to Motor City recovery: in May of 2014, the Detroit Blight Removal Task Force — which includes representatives from Detroit Public Schools, U-SNAP-BAC Inc. and Rock Ventures — identified more than 78,000 properties in need of sales, repair, or demolition. That is, federal help seems to have sparked a critical revival of affected assessed property values and, ergo, the Motor City’s revenues: the report found demolitions have increased the value of surrounding homes within 500 feet by 4.2 percent, or an average of $1,106. Citywide, that amounts to an increase in home values of more than $209 million. The bad news is that even as this innovative federal program is beginning to demonstrate its ability to contribute to Detroit’s comeback, the assistance in financing the demolition is drying up.

The report also suggests that combined with other efforts by the city—efforts which include code enforcement and sales of public assets such as side lots—have also begun to make telling fiscal differences: the value of homes nearby increased by 13.8 percent, or an average of $3,634. Citywide, that amounts to an increased assessed property value of about $410 million—or as Mayor Mike Duggan describes it: “The numbers are extraordinary,” noting that eliminating blight has allowed “good homes and good vacant homes” to increase in value: from January of last year until last, 5,812 blighted structures in the city were demolished thanks to funding from the federal “Hardest Hit” fund—a now drying up fund focusing nearly $8 billion in post Great Recession assistance foreclosure prevention in 18 states, including Michigan, with where Michigan’s share was over $498 million, of which Detroit received just over one fifth. Because those funds will be depleted this year, Mayor Duggan is planning to travel to Washington soon to meet with White House officials and others to lobby for the next round of money—especially since the demolitions to date have only addressed some 10 percent of the city’s blight.

Good Gnus. In its review of Chicago’s proposed FY2016 Budget, Kroll Bond Rating Agency (KBRA) reports it believes Mayor Rahm Emanuel’s budget includes “reasonable actions for closing the projected fiscal 2016 operating shortfall, and represents clear progress in confronting the challenges of unfunded pension liabilities.” The Budget closes the city’s FY2016 gap via proposed savings and reforms, efficiencies, and significantly increased property taxes from a four-year phased-in $543 million increase in the property tax levy, earmarked to specifically address rising police and fire pension liabilities. The rating agency wrote it believes the choice of a property tax levy increase demonstrates the Chicago’s political will to craft an effective and sustainable solution. Nevertheless, the agency noted there still remain numerous unresolved issues, which could potentially undermine budgetary goals: first, will the City Council, in an election year, approve the Mayor’s proposed budget? Second, the big shoulder city is relying on State action to increase the size of the home-owners property tax exemption, which would exempt homes valued at less than $250,000 from the increase—this a state legislature which is locked in a stalemate with the Governor. The phased-in property levy increases assume that Senate Bill 777, which reforms police and fire pension funding, will be enacted into law—and not be rejected by the Illinois Supreme Court. If not enacted, Chicago’s police and fire pension funding obligation would immediately rise from approximately $328 million to $550 million, and the city would have to identify and act on additional funding sources.

Not the Odor of Verbena. The Securities and Exchange Commission (SEC) has settled its almost six-year-old pay-to-pay case against two ex-JPMorgan bankers involved in hold-your-nose, soured sewer deals that thrust Jefferson County, Ala., into municipal bankruptcy. The SEC, according to a notice filed in federal court this week, reported it had reached agreement with Charles LeCroy and Douglas MacFaddin via mediation which resolves securities fraud charges against the two, albeit the actual terms of the settlement will not be made public until it is presented to the full commission for approval, with the independent federal securities agency advising the federal district court that, if the Commission approves the report, that would end litigation on the case. The long, simmering case dates back just about six years to when the SEC filed a civil suit alleging that Messieurs LeCroy and MacFaddin had improperly arranged payments to local broker-dealers in Alabama to assure that certain Jefferson County commissioners would award $5 billion in county sewer bond and swap deals to JPMorgan. The SEC suit, which charged that the two men “privately agreed with certain county commissioners to pay more than $8.2 million in 2002 and 2003 to close friends of the commissioners who either owned or worked at local broker-dealers,” sought declaratory and permanent injunctions against the two for federal securities law violations, as well as disgorgement of all profits they received as a result of their legal misbehavior, plus interest. The SEC had brought the suit simultaneously with its settlement of municipal securities fraud charges with the investment bank. Without admitting or denying the SEC’s charges, JPMorgan agreed to pay $75 million in penalties eventually turned over to Jefferson County, and to forfeit more than $647 million of claimed swap termination fees. In January, the SEC sought summary judgment in the case, leading U.S. District Court Judge Abdul Kallon to determine the five-year-old case was appropriate for mediation—this all in a case involving some nearly two dozen municipal elected officials, contractors, and county employees involved in Jefferson County’s sewer bond sales or construction of the sewer system who were jailed for bribery and fraud—and which led to what was, at the time, a filing for the largest municipal bankruptcy in U.S. history.

Wither Its Future—and Who Decides? Facing decades of structural budget gaps and unsustainable legacy costs, the City of Pittsburgh entered two forms of state oversight in 2004. In the subsequent decade, that engagement appeared to have been key to a turnaround in the city’s structural deficits, leading to annual positive fund balances, as the then-partnership helped restructure its crushing debt load, streamline an outsized government, and earn a triple-notch bond rating upgrade. Nevertheless, the Steel City still carried a $380 million pension liability, leaving questions with regard to whether the city was ready to graduate from state oversight – especially given the extra relief from restrictive state laws that the state’s Act 47 provides to city officials. Now that state-local tension seems to be back, with the Pennsylvania Intergovernmental Cooperation Authority (ICA), the city’s overseer, an authority state lawmakers formed in 2004 to oversee Pittsburgh’s finances, at a time the city was on the precipice of municipal bankruptcy, claiming it is justified by state law in withholding Pennsylvania gambling revenue from the city (ICA is invoking Act 71 of 2004, a state statute which grants, according to ICA, has “exclusive control” of the gaming revenues dedicated for Pittsburgh, the only second-class city under the commonwealth’s system of categorizing cities.), because, as the Intergovernmental Cooperation Authority’s Henry Sciortino, reports: “They haven’t met certain benchmarks.” Indeed, the former amity is now gone: Pittsburgh is suing the state agency in the Allegheny County Court of Common Pleas, accusing it of illegally withholding $10 million in annual gambling host city revenue funds the past two years related to the Rivers Casino—a costly dispute triggered by state agency claims that Pittsburgh Mayor Bill Peduto is backing off his commitment of $86.4 million to fully fund current payments to retirees – separate from the city’s overall unfunded pension liability estimated in the hundreds of millions. In addition, Mayor Peduto requested that Pennsylvania Auditor General Eugene DePasquale conduct an audit of the ICA—a request putting Mr. DePasquale now in a most awkward position in the wake of the city’s decision to file suit. Moreover, the city-state dispute—itself now becoming a costly court battle—arises even as the city faces daunting pension challenges: returns on the city’s employee pension funds have, according to the State Auditor, deteriorated from 16.3% in fiscal 2013 to 5.5% this year, reflecting the slowdown in financial markets, who estimates the city’s funds’ assets to be $675 million versus liabilities of almost $1.2 billion. Indeed, the Public Employee Retirement Commission considers Pittsburgh’s pension fund “moderately distressed.” In a letter to Gov. Tom Wolf and top legislative leaders a week ago, ICA Chairman Nicholas Varischetti called pension underfunding “one of the most serious barriers to Pittsburgh’s fiscal stability.” That statement comes in the wake of Pittsburgh’s efforts just five years ago to avoid a state takeover of its pension funds by earmarking nearly $750 million in parking revenues over three decades to prop its funding level above a state-mandated 50%. Keeping this growing state-local dispute constructive could matter: over the last decade, Pittsburgh has received 11 upgrades, most recently in early 2014 when S&P elevated its general obligation rating to A-plus, and Moody’s, just a year ago, revised its outlook to positive on the steel city’s general obligation bonds. The city’s suit alleges the ICA has been illegally withholding $10 million in annual gambling host city revenue funds the past two years, whilst, for its part, ICA officials claim Mayor Peduto is backing off his commitment of $86.4 million to fully fund current payments to retirees. Indeed, in an epistle to Gov. Tom Wolf, ICA Chairman Nicholas Varischetti wrote that pension underfunding was “one of the most serious barriers to Pittsburgh’s fiscal stability.” The state-local tension over the city’s pension liabilities is hardly new–five years ago Pittsburgh avoided a state takeover of its pension funds by earmarking nearly $750 million in parking revenues over 30 years to prop its funding level above a state-mandated 50%; however, once again, state apprehension is on the uptick that the city is, as one expert, David Fiorenza, a Villanova School of Business professor and a former chief financial officer of Radnor Township, said: Pa., said “[O]nce again the municipality is only fixing the leak and not curing the flooding problem of pension debt and other unfunded liabilities looming around like an albatross,” adding that he believes the state ICA can be a force to persuade cities to devote gambling revenues to other areas of the budget, such as pensions.

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 Bankruptcy Is Large, Complicated, & Seemingly Unending

September 10, 2015

Fiscal Gales in the Windy City. As the City of Chicago grapples with its growing unfunded pension liabilities, the city’s fiscal sustainability has become increasingly at risk—putting Mayor Rahm Emanuel nearer to a fiscal cliff for the Windy City. Increasingly the unfunded pension liabilities are threatening the city’s fiscal future, and the options on the table—such as a potential huge property tax hike to fund the city’s pension liabilities portray how risky the city’s fiscal future and options are: would a huge property tax increase discourage businesses and families from moving into Chicago? Or, as the ever insightful Laurence Msall, president of the Chicago Civic Federation, puts it: “How is Mayor Emanuel going to convince the City Council and the citizens of Chicago that with this very painful and, we believe, necessary increase?” The question arises as Mayor Emanuel may seek a record half billion property tax increase to address the city’s rising pension costs—and avoid bankruptcy. The city is also considering the imposition of a new levy for garbage collection, as well as other revenue sources to respond to a $328 million to $550 million scheduled annual spike in police and fire pension contributions under a prior state unfunded mandate requiring the city to make such contributions on an actuarial basis. The window for the Mayor is winnowing down: he is scheduled to release his proposed budget a week from Tuesday—a budget in which, in addition to tax and revenue proposals, Mayor Emanuel is also expected to propose a long-term fiscal plan which will also include changes in both spending habits and debt practices in what Mr. Msall denotes as a day of reckoning for Chicago. Chicago’s fiscal dilemma is further complicated by the ongoing stalemate in Springfield, where Gov. Bruce Rauner and the legislature remain deadlocked, so that there is still no FY2016 budge—where the stalemate shows little sign of abatement. For Mayor Emanuel, no matter the stalemate in the state capitol, he has just over 10 days to put together a proposed $754 million budget—one likely to incorporate a $233 million operating deficit, $93 million in increased city contributions owed to the municipal and laborers’ pension funds, and about $100 million in debt repayment the city previously intended to defer in its amortization schedule. The budget is almost certain to propose a $328 million hike in contributions for Chicago’s police and firefighters’ pension funds—but mayhap larger if the legislature and Gov. in Springfield are unable to reach consensus on pending state legislation which would re-amortize payments.

Fiscal Teetering in Pa.’s Capitol City. In his State of the City address this week, Harrisburg Mayor Eric Papenfuse warned that the city’s plan it adopted two years ago when the city narrowly averted filing for municipal bankruptcy must be amended—noting that the revenues assumed under that plan are falling short and will be insufficient by next year—and making clear that the deficiencies could not be offset by cost-cutting alone, especially since, he noted: “While the City is starving for capacity, we have already cut discretionary funding to the bone.” Indeed, Mayor Papenfuse noted the city has reduced its work force by nearly half over the last decade and that this fiscal year “will mark the second year in a row that we have significantly underspent our adopted budget.” Nevertheless, he warned, this city is simply not on a “sustainable course.” Therefore, he has proposed three key fiscal changes: 1) Tripling the municipality’s $1-per-week tax on employees working within the city limits to $3 per week; 2) Expanding the city’s sanitation operations, and 3) Transitioning to home rule authority.

Planning Debt Adjustment. The nation’s last large municipality in municipal bankruptcy, San Bernardino, has reached a tentative contract agreement with its largest employee group, its so-called general unit. The announcement, Tuesday, reached after last month’s agreement with the city’s Police Officers Association, means that San Bernardino now has plan of debt adjustment agreements with nearly all its employees—except its firefighters—where multiple legal complaints by the fire union against the city continue. Indeed, in the wake of the city’s rejection of its bargaining agreement with the fire union and implementing changes, including closing fire stations—in an election year—the city hopes to reach agreement on the fire front within a week, even as the city is proceeding in its process of having its fire department annexed into the San Bernardino County fire protection district—a key step anticipated to add more than $12 million to the bankrupt municipality’s treasury: $4.7 million in savings and $7.8 million in revenue from a parcel tax, according to San Bernardino’s bankruptcy attorney, Paul Glassman—or more than the $7 million to $10 million in savings the city incorporated into its proposed plan of debt adjustment it submitted to U.S. Bankruptcy Judge Meredith Jury—proposing that the funds should go toward pension obligation bondholders whom San Bernardino proposes to pay 1 cent for every dollar they are owed, according to the bondholders’ attorney—a proposal certain to be bitterly challenged in the federal courtroom. Complicating the process—and quite unlike any other major municipal bankruptcy—is that it remains unclear what might occur were the proposed annexation process to break down between now and July — especially were a sufficient number of San Bernardino voters to protest the tax and trigger an election. Although missing the deadlines required to complete the annexation process by July 2016 would be costly (because it would trigger a full fiscal year delay), an interim agreement with the San Bernardino County Fire Department would continue to provide services. Next up: Judge Jury has scheduled a hearing in her federal courtroom next month on the adequacy of San Bernardino’s financial statements and its modified plan of debt adjustment for October 8th.

Debt Restructuring Outside of Bankruptcy. The U.S. territory of Puerto Rico yesterday proposed a five-year plan Document: Puerto Rico’s Debt Plan under which the island would broadly restructure its unpayable debts, restructuring more than half its $72 billion in outstanding municipal bond debt, and seeking to implement major economic overhauls—and act under the direction of a financial control board—somewhat akin to the actions taken in New York City and Washington, D.C. to avert municipal bankruptcy. The proposed plan also proposed changes, such as welfare reform, changes to labor laws, and elimination of corporate-tax loopholes. Under the proposal, the governor would select a five-member control board from nominees submitted by creditors, outside stakeholders, and, possibly, the federal government—a panel which would have the power to enforce budgetary cuts. The document explains that Puerto Rico confronts a $13 billion funding shortfall for debt payments over the next five years—even after taking into account proposed spending cuts and revenue enhancement measures outlined in a long-awaited fiscal and economic growth plan. The report from Puerto Rico Governor Alejandro Garcia Padilla’s administration notes that Puerto Rico will seek to restructure its debt in negotiations with creditors as an alternative to avoid a legal morass which could further weaken the territory’s economy: it offered no estimates of what kind or level of potential losses would be anticipated from the owners spread across each of the nation’s 50 states of Puerto Rico’s $72 billion in outstanding municipal debt. The plan details the grim situation of Puerto Rico’s fiscal challenges—and of the dire consequences to the island’s 3.5 million residents: Puerto Rico will have less than a third of the fiscal resources to meet its obligations: it has only about $5 billion available to pay $18 billion of principal and interest payments to its municipal bondholders spread all across the U.S. and coming due between 2016 to 2020—and that only if the plan’s proposed savings from the consolidation of 135 public schools, reductions in health-care spending, additional subsidy cuts, and reductions in payroll expenses were realized. Mayhap the greatest obstacle under the proposed plan will be its proposal to restructure Puerto Rico’s general obligation bond debts, municipal bonds which were sold to investors with an explicit territorial constitutional promise that Puerto Rico would commit to timely repayments—repayments which would take priority over all other governmental expenditures. Nevertheless, the plan proposes to renege on the so-called ‘full faith and credit’ pledge attached to municipal bonds issued by state and local governments on so-called general obligation or ‘full faith and credit’ bonds—a proposal which is unconstitutional under the territory’s constitution—but which the island’s leaders contend is critical lest Puerto Rico were to run out of cash by next summer—as its current fiscal projections indicate is certain absent access to municipal bankruptcy protection or triggering a proposal such as has been now proposed. The plan leaves unclear how it squares with Puerto Rico’s constitution; yet island officials made clear that were Puerto Rico to continue to make such required payments, Puerto Rico’s treasury would be depleted by next summer—with such payments, were they not cut back, leaving the government short of cash for vital public services as early as November. Under the proposed fiscal blueprint, Puerto Rico will provide its creditors with more detailed cash flow projections so that negotiations could begin on repayment alternatives and options—negotiations not only pitting the island’s essential services against bondholders in every state in the U.S., but also between classes of municipal bondholders—with general obligation bondholders anticipated to seek the most favorable treatment. One of the exceptional challenges will be that—unlike in Jefferson County, Detroit, Stockton, or San Bernardino—there will be no referee, no federal bankruptcy judge—to oversee the process. In addition to the debt restructuring, the new five-year plan calls for an ambitious series of steps to deliver public services and collect taxes more efficiently, stimulate business investment and job creation and carry out long-overdue maintenance on roads, ports and bridges. Many of the measures will require legislative approval.

Financial Control Board. The plan proposes a five-member board of independent fiscal experts who would be selected from a list of candidates nominated by different parties, including classes of creditors, the federal government, and others. Such a board would be charged with: how to deal with disproportionate and inequitably imbalanced creditors—creditors imbalanced not just fiscally, but also in terms of capacity to represent themselves. How do the island’s poorest U.S. citizens (an estimated 48 percent of Puerto Ricans are Medicaid recipients) fare against some of the wealthiest U.S. citizens who live in Alaska, California, New York, etc., and who own Puerto Rican G.O. bonds? That is, as members of Governor Padilla’s working group have noted, the inability to have access to a neutral federal court and legal process could put the island—and especially its poorest Americans—at the greatest disadvantage.

Fiscal Challenges. Gov. Padilla’s working group plan projected that, if the plan were adopted and implemented, it would be key to bringing Puerto Rico’s five-year total fiscal deficit down to about $13 billion. To close it, however, they made clear, Puerto Rico could not meet its full municipal bond payment obligations. The working plan estimated that over the next five years, Puerto Rico would have to make $18 billion in principal and interest payments to municipal bondholders on some $47 billion in outstanding municipal bond debt—but that they would propose diverting $13 billion to finish paying for essential public services over the coming five years, leaving for a Solomon’s choice about how to apportion deep cuts in Puerto’s Rico’s constitutionally obligated payments to bondholders scattered all across America—and no road map or federal bankruptcy judge to opine what might be the most equitable means in which to opt to make such payments—much less what legal ramifications might trigger. Put in context, the plan proposes a fiscal restructuring significantly larger than Detroit’s record municipal bankruptcy filing—a filing with U.S. Bankruptcy Judge Steven Rhodes which involved some $8 billion of municipal bond debt. Puerto Rico entities are unable to access Chapter 9.

Muni Bankruptcy Is Large, Complicated, & Seemingly Unending. Jefferson County, which emerged from what was—at the time—the largest municipal bankruptcy in U.S. history nearly two years ago now can better appreciate that it “ain’t over until it’s over,” finding itself before the 11th U.S. Circuit Court of Appeals this week where a group of the County’s residents claimed they were denied constitutional protections under the decision of the U.S. bankruptcy court’s approval of Jefferson County’s plan of debt adjustment, with their attorney testifying: “The essence of our client’s position to the 11th Circuit Court of Appeals is that our clients are entitled to their day in court on the merits of the legal issues presented by the Jefferson County plan of adjustment,” adding that while it was “understandable that the U.S. bankruptcy court wanted to bring the case to closure…fundamental constitutional issues simply cannot be trumped by such concerns.” The issue is whether the court should accept or reject Jefferson County’s appeal of a September 2014 ruling by U.S. District Judge Sharon Blackburn, in which Judge Blackburn rejected the county’s arguments that the ratepayers’ municipal bankruptcy appeal was moot, in part because the plan had been significantly consummated, but also because Judge Blackburn claimed she could consider the constitutionality of Jefferson County’s plan of debt adjustment, which ceded Jefferson County’s future authority to oversee sewer rates to the federal bankruptcy court. The odoriferous legal issue relates to Jefferson County’s issuance—as part of its approved plan of debt adjustment—to issue $1.8 billion in sewer refunding warrants—an issuance which not only paved the way for Jefferson County to write down some $1.4 billion in related sewer debt, but also to exit municipal bankruptcy and the overwhelming costs of the litigation. Thus, with the sale of the new warrants consummated, Jefferson County exited (or at least believed it had…) municipal bankruptcy. The county’s sewer ratepayers, however, are claiming Jefferson County’s plan contains an “offensive” provision which would enable the federal bankruptcy court to retain jurisdiction over the plan for the 40 years that the sewer refunding warrants remain outstanding—a federal oversight which Jefferson County has argued has provided a critical security feature that has been key to attracting investors to purchase the warrants it issued in 2013—a transaction which the County alleges cannot be unwound—and added that the appeal by the residents is constitutionally, equitably, and statutorily moot, because the plan has already been implemented. The ratepayers have countered that even if the federal oversight provision were to be deleted from the County’s approved plan of adjustment, the indenture for the 2013 sewer warrants provides greater latitude to resolve a default: noting that were a subsequent fiscal default to occur, “the trustee shall be entitled to petition the bankruptcy court or any other court of competent jurisdiction for an order enforcing the requirements of the confirmed plan of adjustment.” (Such requirements include increasing rates charged for services, so that the sewer system generates sufficient revenue to cure any default.) But it is the provision allowing the federal bankruptcy court to maintain oversight which is central to Jefferson County’s position—in no small part because it offers an extra layer of security for bondholders and prospective bondholders of a municipality which opts to avail itself of a provision in the U.S. bankruptcy code which allows the judicial branch of the U.S. to retain oversight of a city or county’s plan of fiscal adjustment—or, as the perennial godfather of municipal bankruptcy Jim Spiotto puts it, the question in Jefferson County’s case involves an interpretation over what the U.S. bankruptcy code permits and whether the federal court’s supervision is actually the act of setting rates or insuring that the county complies with the covenants that it promised.

In Jefferson County, as in most cities and counties, sewer system rates have been set by resolutions approved by the Jefferson County Commission to fix rates and charges sufficient to cover the cost of providing sewer service, including funds for operations and maintenance, capital expenditures, and debt service on the 2013 warrants. Jefferson County’s attorneys have added that neither the plan of adjustment or U.S. Bankruptcy Judge Thomas Bennett’s confirmation order “changes the substantive law of the state of Alabama with regard to the enforcement of rates established pursuant to contract or legislation….Rather, the plan merely retains the bankruptcy court as an available forum in which such substantive law may be enforced, using the same remedies available in Alabama state court…In no event will the bankruptcy court ever set sewer rates; it is simply a forum to enforce the plan and related contracts – just as an Alabama state court could.” Ergo, part of the federalism issue and challenge relates to the Johnson Act, which essentially prohibits federal courts from taking actions that directly and indirectly affect the rates of utilities organized under state laws. In this instance, the ratepayers have claimed that the removal of the “retention of jurisdiction provision” from Jefferson County’s bankruptcy confirmation order would not unlawfully impose a new, involuntary plan on the county and its residents because “the indenture explicitly contemplates that the purchasers of the new sewer warrants may seek relief from courts other than the bankruptcy court.” Moreover, they claim the transaction would not have to be unwound were the U.S. district court to strike the jurisdictional retention provision from the plan, because the sewer bondholders could seek relief from other courts were Jefferson County to fail to increase sewer rates. The court directed Jefferson County to respond to its challenging sewer ratepayers by Monday, September 28th. Stay tuned.

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.”

Ensuring a Sustainable & Safe Municipal Future

July 9, 2015

The Road Back from Municipal Bankruptcy. Jefferson County Commission President Jimmie Stephens notes that the County’s return to fiscal sustainability in the wake of its successful exit from municipal bankruptcy—the largest in U.S. history at the time, has improved enough for the county to reenter the municipal market: “This Commission is dedicated and determined to follow the judge’s order and to follow the bankruptcy plan…There are still plenty of challenges, but we’re working together and that gives us opportunities for success…We’re doing our due diligence and making sure that we don’t revisit some of the mistakes of the past.” Jefferson County’s assessed property values have increased, sales and use tax collections are up, and Jefferson County is now prepping to host the World Games athletic competition in 2021. The county’s budget has remained structurally balanced, but, unsurprisingly, the recovery has been insufficient to provide for less anticipated needs: there have been insufficient revenues to resume some services, such as to complete the County’s road-paving program.

Commission President Stephens also reports rejuvenated relationships with the Alabama legislature, noting: “We went to the Legislature with a genuine set of needs, not wants…In order to do our job and be effective in our job, we needed additional revenue to reinvest in the future of Jefferson County.” The presentation included the detailed steps the County has taken as part of its implementation of its approved plan of debt adjustment by U.S. Bankruptcy Judge Thomas Bennett—albeit that plan has been under challenge before the 11th U.S. Circuit Court of Appeals for nearly two years: a key issue before the federal court is whether a lower-court appeal of Jefferson County’s plan of debt adjustment by a group of county sewer system ratepayers is moot, with Jefferson County’s attorneys arguing that the appeal is not viable, because the court-approved bankruptcy exit plan was largely implemented following the sale of $1.8 billion in 40-year sewer refunding warrants in December 2013—warrants which allowed the county to write down $1.4 billion in related sewer debt in an intricate transaction that cannot be unwound, according to the county’s attorneys. Notwithstanding, the federal judge presiding over the ratepayers’ appeal has ruled that the county’s plan of debt adjustment is not moot, because some key components are questionable, including a provision which requires the federal bankruptcy court to ensure that county officials adopt sewer rates sufficient to pay debt service on the refunding warrants—a key provision to the county’s ability to successfully issue a refunding two years ago. Jefferson County attorneys have urged that it is critical for the appellate court to resolve the mootness issue for investors and the stability of any municipality relying on exit financing to emerge from bankruptcy.

Is Puerto Rico Being Held Up? The U.S. House Judiciary Committee appears unwilling to provide Puerto Rico with access to the U.S. bankruptcy courts to offer the U.S. territory a time out to ensure the continuity of essential public services and to reorganize its debts under the oversight of a federal court. Chairman Bob Goodlatte (R-Va.) yesterday said: “Today, we met with our Republican colleagues on the Judiciary Committee to discuss the issues facing Puerto Rico…While no consensus was reached, a general concern was expressed that to provide Puerto Rico’s municipalities access to chapter 9 of the Bankruptcy Code would not, by itself, solve Puerto Rico’s difficulties, which are associated with underlying, structural economic problems.” That is, to offer protection to ensure the health and safety of U.S. citizens in the island’s 78 municipalities would, apparently, be an insufficient motive to act. The refusal to take any action as Congress nears its next five week recess—the very time period when Puerto Rico could default—could increase the import of the efforts by Sens. Chuck Schumer (D-N.Y.) and Richard Blumenthal ( D-Conn.), who indicate they intend to propose companion legislation to the now spurned H.R. 870 in the Senate. The House refusal to act comes as a number of Presidential candidates, including former Florida Governor Jeb Bush, former U.S. Senator and Secretary of State Hillary Clinton, and Sen. Bernie Sanders (I-Vt.) have also called for Congressional action on the issue.

Steep, Treacherous Fiscal Road Ahead. Just two years ago, we wrote: “Baltimore reached a peak population of 949,708 in 1960 and 30% of Maryland’s population resided in the city at that time. By 2010, the population had dropped to 620,961 and the city’s share of the state’s population fell to 11%. Like many Eastern and Midwestern cities, a significant portion of this loss in population is attributable to the decline of its industrial base and suburbanization. Baltimore lost 110,000 jobs between 1990 and 2010—about 24% of all jobs. Seventy percent of these jobs lost were in manufacturing and related industries. There are approximately 16,000 vacant and abandoned properties in the city—one blighted property for every 40 residents. Median household income is 44% lower than that of the state and crime is 86% higher. Through all of this change, Baltimore still retains its position as the only large city in Maryland and serves as its principal urban hub. Unlike other cities in this report, Baltimore has not been in a fiscal emergency and has a relatively healthy balance sheet.” Indeed, the Maryland legislature has explicitly rejected granting the option of municipal bankruptcy for its cities and counties.

But in the wake of the death of Freddie Gray last April, the fiscal and human challenges confronting the city are almost beyond our imagination. Yesterday, Mayor Stephanie Rawlings-Blake fired the city’s Police Commissioner, stating: “[A]s we have seen in recent weeks, too many continue to die on our streets, including three just last night and one lost earlier today.” As of yesterday, police report a 48 percent increase in homicides over last year–with May’s 42 the most in a month in a quarter century. Non-fatal shootings are 86 percent higher than last year–yet, even with the exceptional increase in shootings, the number of arrests is half of last year’s. In the wake of injuries to as many as 160 police officers during the rioting in Baltimore–even as uncertainty has increased with regard to what actions police officers can take when being assaulted–there appears to be greater and greater reluctance on the part of the rank and file to be entrapped between the Scylla and Charybdis of being injured or being charged with a crime for being too aggressive in enforcement.

According to the city’s police department, gunmen killed three people and wounded one yesterday near the University of Maryland, Baltimore—shootings in a municipality that has witnessed a record upsurge in homicides since April: shootings here which can hardly augur well for the University. While police stated the shootings were not related to the university, the Baltimore Sun reported that shots had been fired into a vehicle traveling on the same block five days ago. Police also report that looting of pharmacies during the unrest and a subsequent drug turf war have been behind a surge in killings in May—a month in which the city experienced 43 homicides, the highest number since 1972, but dropped the total to 42 when one killing was reclassified as justified. A police spokeswoman yesterday put the May homicide number at 41, the highest monthly tally since August 1990, without explaining the new total.

Baltimore reached a peak population of 949,708 in 1960—a time when 30% of Maryland’s population resided in the city; by last year, that number had dropped to 620,000–and the city’s share of the state’s population fell to 11%. Like many Eastern and Midwestern cities, a significant portion of this loss in population was attributable to the decline of its industrial base and suburbanization: Baltimore lost 110,000 jobs between 1990 and 2010—about 24% of all jobs: seventy percent of these jobs lost were in manufacturing and related industries. There were approximately 16,000 vacant and abandoned properties in the city in 2010—one blighted property for every 40 residents. Median household income was 44% lower than that of the state, and crime was 86% higher. This year, the city’s homicide rate—prior to last night’s shootings, had reached 155 homicides—or nearly 50 percent higher than at this point last year. The exceptional challenge—not just for the Mayor and Council, but also for Gov. Larry Hogan and the Maryland legislature is how to try to staunch the mayhem and its exceptional erosion of the city’s future fiscal stability.

The Intergovernmental & Governance Challenges to Municipal Sustainability

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June 18, 2015

Visit the project blog: The Municipal Sustainability Project 

S-O-S. Wayne County Executive Warren Evans yesterday, writing that “Wayne County’s fiscal situation will continue to deteriorate without further remedial measures,” requested the State of Michigan to issue, on an expedited basis, a declaration of financial emergency. Mr. Evans wrote to Michigan State Treasurer Nick Khouri to request a preliminary review and declaration of financial emergency, citing several key issues which, he wrote, “threaten the county’s ability to provide necessary governmental services essential to public health, safety, and welfare,” referring to a projection that Wayne County’s accumulated unassigned deficit would grow from $9.9 million in the current fiscal year to $171.4 million by 2019, the county’s junk bond rating, and the judgement levy this month in a pension case that will cost taxpayers an estimated $50 in a one-time property tax assessment this summer on a $100,000 house. The epistle comes in the wake of a stream of warnings Mr. Evans has provided with regard to the County’s structural deficit and its unfunded pension liability—a liability now estimated to be approaching $1 billion—and comes in the first year of neighboring Detroit’s implementation of its municipal bankruptcy plan of debt adjustment in a city where the school system is under a state-appointed emergency manager—and where there are, as we noted yesterday, questions about the state’s legal authority to impose an emergency manager. Mr. Evans, in a release subsequent to the request, reported Wayne County would continue to negotiate with stakeholders under a consent agreement: “Our recovery plan provides a clear path to financial stability for the county, but we are keenly aware that our time frame to get the job done is quickly fading…Throughout this process we are constantly evaluating where we stand and proactively seeking solutions to work ourselves out of this massive deficit. I am requesting this consent agreement because the additional authority it can provide the county may be necessary to get the job of fixing the county’s finances done.” Under Michigan’s law, the state will first determine if a preliminary review is warranted, and, if so, the Treasurer will have up to 30 days to complete a preliminary review and final report—after which the local emergency financial assistance loan board would have 20 days to determine if probable financial stress exists—a finding seemingly likely here, and one which, if made, would trigger Governor Rick Snyder’s appointment of a financial review team, which would have up to 60 days to perform a more in-depth study—a study which could result in the appointment of an emergency manager or a consent agreement or emergency manager.

Under a consent agreement, the county would retain authority to implement pieces of County leader Evans’ plans, although complicated by the existence of constitutionally mandated positions, such as the sheriff and prosecutor complicate the prospects for a workable consent agreement. A consent agreement would be designed to allow the county to maintain a level of local control while providing a plan for managing the financial crisis with state assistance. Mr. Evans said a consent agreement would allow the county to continue negotiations with stakeholders while giving the county the ability, if necessary, to find other ways to achieve cost-savings and address the county’s $52 million structural deficit — a recurring shortfall that stems from an underfunded pension system and a $100 million yearly drop in property tax revenue since 2008: “Our recovery plan provides a clear path to financial stability for the county, but we are keenly aware that our time frame to get the job done is quickly fading.”

Because Wayne County surrounds Detroit, the two municipalities are not just linked geographically, but also fiscally. It is hard to imagine what the impact of insolvency for Wayne County would mean for Detroit’s ongoing recovery and implementation of its federally approved plan of debt adjustment.

It Ain’t Over Until It’s Over. While going through municipal bankruptcy can be fiscally and governmentally draining, it turns out that emerging from municipal bankruptcy—even once a U.S. Bankruptcy Court has approved a municipality’s plan of adjustment, might not suffice. So it is that in the wake of U.S. District Judge Sharon Blackburn’s rejection last September of Jefferson County’s contention that the appeal of U.S. Bankruptcy Judge Thomas Bennett’s decision approving the county’s—at the time—exit from the largest municipal bankruptcy in U.S. history just might not prove to be the last word. In rejecting Jefferson County’s argument that the appeal was moot, Judge Blackburn also said that she would consider the constitutionality of the county’s approved adjustment plan that cedes the county’s future authority to oversee sewer rates to the federal bankruptcy court. So it was that this week. Jefferson County’s attorneys argued in the 11th U.S. Circuit Court of Appeals that investors in the financing that enabled the county to exit bankruptcy nearly two and a half years ago should not have the “rug pulled out from under them” by losing a prime security feature they relied upon in deciding to loan the county money—referring to the security feature of the federal bankruptcy court’s oversight of Jefferson County’s plan of adjustment for the 40 years that the sewer refunding warrants remain outstanding—a key provision of the county’s plan of debt adjustment. As the godfather of municipal bankruptcy, Jim Spiotto, notes, what transpires in this appeal will have broader implications for all municipal bond market investors who rely on security enhancements, such as promised rate covenants or court oversight as part of their investment decisions: “To the market, hopefully the result [of Jefferson County’s case] will be a reaffirmation that rate covenants will be and should be enforced, and if you make a promise, especially in a Chapter 9 plan, it should be enforced as any contractual promise is.” In its 93-page brief, Jefferson County attorneys requested oral arguments to examine the constitutional, statutory, and equitable principles of the case which “are particularly important to governmental entities that may consider Chapter 9 relief now or in the future, as well as to the municipal debt market.” The issue underlying the appeal centers on whether proper legal steps were taken when Jefferson County’s bankruptcy plan was appealed to the U.S. District Court in Alabama by 13 residents and elected officials on the county’s sewer system, described as the “ratepayers” in court documents, who, Jefferson County attorneys argued, had failed to obtain the required legal “stay” suspending the plan while the appeal proceeded. Without any barriers to re-enter the bond market, Jefferson County proceeded to issue $1.8 billion in sewer refunding warrants in December 2013 that allowed the county to write down $1.4 billion in related sewer debt and exit bankruptcy. With the sewer refunding warrants long since sold to new investors, the complex plan of adjustment cannot be unwound, the attorneys wrote. Mr. Spiotto notes that the issue here comes down to an interpretation with regard to what chapter 9 permits and whether the bankruptcy court’s supervision is actually the act of setting rates or insuring that the county complies with the covenants that it promised. In its petition for an appeal before the 11th Circuit, Jefferson County wrote that neither its court-approved plan of adjustment or Judge Bennett’s confirmation order “changes the substantive law of the state of Alabama with regard to the enforcement of rates established pursuant to contract or legislation…Rather, the plan merely retains the bankruptcy court as an available forum in which such substantive law may be enforced, using the same remedies available in Alabama state court…In no event will the bankruptcy court ever set sewer rates; it is simply a forum to enforce the plan and related contracts – just as an Alabama state court could.” As Mr. Spiotto notes: here, no person—or court—is attempting to usurp the right of the state or a municipality under state law: “At the same time, no state or municipality should believe that it can make a promise and not live up to it: Whether you give it as Detroit did as a statutory lien or you have the court involved there are different roads to the same summit.”

Who has standing in a municipal bankruptcy case–and whether taxpayers, citizens, citizen groups, and major businesses in a municipality should have a role e in connection with the plan of debt adjustment, was a question I posed to U.S. Bankruptcy Judge Steven Rhodes for an interview with State Tax Notes. Judge Rhodes, in his response, wrote:

  1. This is perhaps among the most difficult questions in chapter 9. One practical reality is that every resident and business in a municipality that is going through a bankruptcy case has a direct and personal stake in the outcome of the case, although that stake may or may not be a financial stake in the strictest sense. But another practical reality is that the case has to be manageable. Most cases therefore deny standing to residents, concluding that the municipality’s democratically elected leadership adequately represents the residents’ interest in the case. That was my conclusion in a previous chapter 9 case called Addison Community Hospital District.

But the question is more complex where, as in the Detroit case, the management of the case is in the hands of an un-elected agent of the state and not the municipality’s elected leadership. In the Detroit case, I decided that a looser application of the traditional standing requirements was needed and so I invited the public to participate in the eligibility and confirmation phases of the case.  I maintained the manageability of the proceeding in other, more creative ways.

I followed up: Should a debtor propose a plan of debt adjustment which requires the debtor to take action that is contrary to state law including disregarding the pledge or dedication of revenues to the debt payment required under state law? In reply to which, Judge Rhodes said: “Yes, if it is necessary to restore or maintain adequate services. Although the Fifth and Fourteen Amendments generally prohibit bankruptcy from impairing property rights, nothing in those amendments or the bankruptcy code prohibits a plan from impairing creditors’ statutory or contract rights under state law.”

The Fate of a U.S. Territory. As Congress readies a hearing next week to consider whether Puerto Rico should be eligible for statehood, pressure continues in a separate committee in the House with regard to whether Puerto Rico should have the same authority as all other states with regard to municipal bankruptcy—that is, the authority to enact legislation which would permit any of its 157 municipalities to file for federal bankruptcy protection. In the latter issue, the struggle is with regard to H.R. 870, legislation proposed by  Rep. Pedro Pierluisi (D-P.R.), which is pending before the House Judiciary Committee—and which has the strong support of Puerto Rico Gov. Alejandro García Padilla. As pending, the bill would allow nearly insolvent governmental authorities, including the islands cities to formally reorganize under U.S. Bankruptcy court supervision—if authorized by Puerto Rico. The legislation, unsurprisingly, is opposed by funds which invest in Puerto Rico bonds, including Franklin Municipal Bond Group and OppenheimerFunds, Inc.: the funds recognize that municipal bondholders—in the event of a municipal bankruptcy—are more likely than not to take a haircut. Thus, they oppose any efforts to grant Puerto Rico the same powers granted to every state, claiming the municipal bankruptcy process is filled with uncertainty. The issues are even more complex from a governance perspective, however: should the bill be amended so that Puerto Rico, itself, could seek access to chapter 9, or should the bill be adopted as proposed, authorizing Puerto Rico to consider whether its municipalities should have access to municipal bankruptcy. Gov. Padilla supports the legislation as drafted; however, municipal distress veteran and long-time specialist Dick Ravitch, who has experience not just from his leadership in averting bankruptcy for New York City in the 1970’s, but more recently during his volunteer service in Detroit’s bankruptcy, has been pressing Congress to modify the bill so that Puerto Rico would itself have access to the U.S. bankruptcy court to reorganize its own debts. Mr. Ravitch fears that the territory, because it has issued so much debt, cannot conceivably repay it all, noting: “I do not believe the economy in Puerto Rico can prosper without a significant restructuring of all the debt.” That position contrasts the veteran municipal distress expert with Rep. Pierluisi, who yesterday released a statement cautioning that Congress would not support the bill to allow the restructuring of the island’s general obligation bonds, stating: “To lobby to amend H.R. 870 to enable Puerto Rico to restructure its general obligation debt is unwise and unnecessary as a matter of public policy.” The questions and issues with regard to equitable treatment for cities in Puerto Rico comes as the House Natural Resources Subcommittee on Indian, Insular, and Alaska Native Affairs has scheduled a hearing for next Wednesday on H.R. 727, proposed legislation to provide a path to statehood for Puerto Rico: the bill would authorize a U.S. sponsored vote to be held in Puerto Rico within one year of its enactment—the gist of which would be whether or not Puerto Rico should become a state. Should that vote be authorized—and the voters in Puerto Rico approve it, then the new state would automatically gain the authority to determine whether its municipalities ought to have access to chapter 9 municipal bankruptcy. Such a decision would also eliminate any authority by Congress to determine the new state’s access to federal bankruptcy, as Puerto Rico would become a sovereign. Former Puerto Rico Gov. Luis Fortuño said the statehood bill is getting a hearing because Rep. Don Young, the Alaska Republican who chairs the panel, is a friend to Puerto Rico and remembers when Alaska was a territory prior to 1959.

The Profound Challenge of Municipal Bankruptcy and Municipal Democracy

April 27, 2015

Visit the project blog: The Municipal Sustainability Project 

Post Municipal Bankruptcy Planning. Even as San Bernardino’s elected and appointed leaders are desperately working to meet U.S. Bankruptcy Judge Meredith Jury’s May 30 deadline to submit the bankruptcy city’s plan of debt adjustment, they are also trying to chart of post-bankruptcy future—and trying to accomplish this exceptional challenge in public meetings and discussions. The city’s-hired consultant Friday noted that San Bernardino’s charter is a significant obstacle, calling  it not only “unusual,” but also the greatest obstacle to the city’s fiscal, or post-bankruptcy future, saying its structure and vagueness “leads to turf fighting, friction, and difficulty getting things done.” The consultant, Andrew Belknap, a regional vice president for San Jose-based Management Partners, told the public meeting the city’s charter is a contributing factor to the city’s operational structure being “more complicated than other cities of its size.” Mr. Belknap presented a 19-page draft document: a draft which included priority goals in several areas: public safety, education and workforce development, quality of life, infrastructure and housing, business development and job creation, community engagement, public relations, and governance. This was not a new issue to the 17 gathered local leaders from various fields, including elected leaders, education, and business when they began this profound effort to remap a municipality’s future last March, but reaching some agreement has become increasingly urgent as the clock is ticking down. Unlike a private corporate bankruptcy, where the issue is about dissolving, municipal bankruptcy is a complex process that must encompass ongoing operations, exceptionally complex negotiations between all the creditors in order to put together and submit to a federal court a proposed plan of debt adjustment—but also a sustainable fiscal map for the future. Or, as San Bernardino County CEO Greg Devereaux, a committee member, and a former Ontario city manager put it: “It’s one thing to have goals, but there needs to be a decision about what is the job of the city and the role of the city in these goals.” Thus, interestingly, at the public meeting Friday, city staff also proposed, as part of the draft Strategic Action Plan: spending $1.7 million on ongoing additional emergency response personnel; $1.5 million for improved library hours, technology, and resources; and $300,000 annually for a repaid response team to rehabilitate vacant and boarded-up structures. Mike Gallo, president of the San Bernardino City Unified School board, and a member of the 17-member citizens group described that as “the most encouraging and surprising thing to come out of the meeting…It was the first time I have seen the city staff engaged in the planning process with the community…I could hear in their voices and see in their eyes that they were excited.” A related part of Friday’s discussion was to review the six guiding principles for the city’s strategic action plan, including the plan to form “a sustainable local government delivering a competitive mix of municipal services” and the city forming a “system of governance that is proven to ‘support satisfactory performance by other municipal corporations of comparable size and complexity.’” But, as Mr. Gallo responded: “This is the lowest expectation I can possibly imagine: We want to prosper. Not just set the floor.” An intriguing part of this discussion came near the end with a discussion between the city’s former and current mayors: former Mayor Pat Morris said he agreed with Mr. Gallo that the proposed mission statement was “mundane in the extreme;” he said the strategic plan needed to align more closely with the ambitions of the priority goals. Nonetheless, the former Mayor praised the meeting overall: “This process is unique in the city’s history…This process is important not just for the strategic plan, but for the advocacy for change.”

Running Out of Time. Standard & Poor’s has significantly downgraded Puerto Rico’s general obligation debt from a B rating down to a CCC plus grade, meaning S&P now grades the U.S. commonwealth’s debt rating four notches above the lowest possible grade of “default.” With Congress set to recess at the end of this week, the U.S. territory’s options for avoiding insolvency and default are waning. S&P reasoned that the island’s access to markets has further weakened, and that political problems, particularly a lack of consensus on elements of the 2016 budget, could further worsen fiscal pressure on the territory: “We base our downgrade…on our view that the commonwealth’s market access prospects have further weakened and Puerto Rico’s ability to meet its financial commitments is increasingly tied to the business, financial, and economic conditions on the island. Absent improvement in those conditions, we believe debt and other financial commitments will be unsustainable.” S&P’s sovereign downgrade came in the wake of the credit rating agency’s earlier downgrade of the Puerto Rico Electric Power Authority (PREPA) to CCC-minus from CCC, with S&P analyst Jeffrey Panger writing that a default seemed inevitable within six months. S&P reported it is concerned by PREPA’s repeated draws on its debt service reserve: PREPA withdrew $42 million in July of 2014, $9 million in October, and then $9 million this month, leading Mr. Panger to write: “We believe a default, distressed exchange, or redemption appears to be inevitable within six months, absent unexpected significantly favorable changes in the authority’s circumstances.” Mr. Panger also noted PREPA had a structural shortfall of revenues compared to expenses and a questionable access to the capital markets―and that it is unclear if PREPA could draw on the $236 million it has on deposit at the Government Development Bank for Puerto Rico. The public utility has $8.3 billion in bonds outstanding. Additional debt brings its debt total to over $9 billion. Both Moody’s and Fitch Ratings predicted a PREPA default is likely.

April 24, 2015

Facilitating Recovery from Municipal Bankruptcy. Stating that “We need to ensure Detroit’s debt is repaid under the terms of the bankruptcy to allow the city to continue its recovery,” Michigan Gov. Rick Snyder yesterday signed into law SB 160, new legislation, adopted overwhelmingly (107-3) in the House last Wednesday, which will provide the city’s municipal bondholders a statutory lien and intercept on Detroit’s income tax. The Governor added: “The savings from lower interest costs will allow Detroit to reinvest in critical areas like public safety and municipal services.” The state actions will likely not only pave the way for the Motor City’s reentry into the municipal bond arena, but also avert any potential adverse credit contagion for other cities and counties across the state. It marked still another sign of essential state support for the city’s future. SB 160 was enacted to create support for some $275 million in municipal income-tax backed bonds that the city privately placed with Barclays last December when it emerged from municipal bankruptcy. The agreement with Barclays required Detroit to roll its debt into long-term municipal bonds within 150 days of the placement—marking the key event of the city’s first post-bankruptcy public financing. While Gov.   Snyder called the bill a “technical fix,” it marks not just a milestone in the city’s return to the municipal market, but also a legal step which could save the city and its taxpayers some $20 million and $30 million in interest costs over the life of the bonds. Under Detroit’s agreement with Barclays, it will have to obtain at least two credit ratings; consequently, city officials hope the new statutory lien and intercept feature will win investment-grade ratings for the debt―currently all of the city’s bond debt is junk rated. Fiscal analysts reviewing the new law said the lien and intercept could save the city between $2 million and $3 million a year on debt service: the $275 million of bonds, which currently feature eight- and 10-year maturities, are Detroit’s only debt backed by an income tax pledge.

It Ain’t Over Until It’s Over. The U.S. 11th Circuit Court of Appeals yesterday ruled that Jefferson County, Ala., can proceed with an appeal related to the county’s plan of debt adjustment in which the County is challenging last year’s decision by U.S. District Judge Sharon Blackburn to reject Jefferson County’s position that its successful exit from municipal bankruptcy cannot be unwound, because its plan of adjustment has been largely consummated. While the appeal is specific to the county’s municipal bankruptcy, its outcome could have reverberations for cities and counties across the nation: in this case, both the Securities Industry and Financial Markets Association and the National Association of Bond Lawyers have filed amicus briefs claiming that a determination by the 11th Circuit Court of Appeals is essential to the stability of the municipal bond market and the certainty of future Chapter 9 bankruptcy cases—briefs accepted by the court this week. The issue revolves around U.S. Bankruptcy Judge Thomas Bennett’s confirmation of Jefferson County’s plan of debt adjustment from two and a half years’ ago—a confirmation which cleared the way for Jefferson County to proceed with the sale of $1.8 billion in sewer refunding warrants to write down $3.1 billion in related outstanding debt. That plan, as approved by the federal court, included provisions to protect new bondholders, including what some believe to be a precedent-setting provision under which that the federal bankruptcy court would continue to oversee promises made by Jefferson County to raise sewer rates over the next 40 years in order to service the sewer debt. But Judge Bennett’s confirmation was appealed by former broker-dealer Calvin Grigsby, a financial advisor and attorney representing a group of local residents and elected officials who are ratepayers to the county’s sewer system—an appeal which Jefferson County sought to dismiss; Jefferson County argued the appeal was constitutionally, statutorily, and equitably moot, because its approved plan of debt adjustment had been largely consummated, and because the ratepayers failed to ask the federal court to issue a stay which would have delayed implementation of the plan during the pendency of an appeal. Nevertheless, Judge Blackburn last September held that the ratepayers could continue their challenge, and that she could find some portions of the confirmation plan unconstitutional. In its amicus brief, the Securities Industry and Financial Markets Association wrote that a prompt review of the lower court’s decision was “imperative to the continued stability and accessibility of the municipal bond market…Accepting the petition will resolve the uncertainty caused by the challenged order about the finality and integrity of confirmed, non-stayed plans of adjustment that contemplate an emerging debtor’s issuance of new bonds or warrants to finance governmental projects and operations, thereby enhancing market acceptance.” The National Association of Bond Lawyers, in their amicus brief, wrote that resolving uncertainties with regard to the finality of U.S. Bankruptcy Court decisions with regard to cities’ or counties final plans of debt adjustment “would assist other financially challenged municipalities who are considering using the Chapter 9 plan process as a way of successfully accessing the public financial markets and to purchase of bonds proposed to be issued under confirmed Chapter 9 plans.”

How Do City’s Leaders Communicate to Citizens & Taxpayers in Preparing a Municipality’s Plan of Debt Adjustment to Exit Municipal Bankruptcy? Meanwhile, in San Bernardino, which is struggling to complete its own plan of debt adjustment under an-ever approaching deadline set by the U.S. Bankruptcy Court, the challenge of juggling the completion of that plan with the city’s responsibility to keep in communication with its citizens and taxpayers has continued to prove to be an exceptional challenge. How, after all, can one fashion a plan that attempts to divvy up far less than what one owes to thousands upon thousands of a city’s creditors—many of whom, after all, are city residents or businesses and taxpayers, in public? Would it be like a football team televising its deliberations in the huddle before the next play? This challenge of democracy in municipalities like Stockton and Jefferson County—and unlike in Detroit or Central Falls, Rhode Island—cities where the state municipal bankruptcy law, by means of the imposition of a receiver or emergency manager removed traditional obligations of transparency with citizens and taxpayers—is a more difficult hurdle. To give an idea of how difficult the process is, a struggle has erupted in San Bernardino with regard to whether a public meeting of the group leading the city’s strategic planning process last night should have been recorded or not — but not broadcast live — has consumed endless hours and emotions. Until Wednesday, City Manager Allen Parker had told City Council members and residents who requested a video recording of the daytime meeting — a meeting, after all, intended by key San Bernardino leaders to both communicate and secure support from the city’s citizens and taxpayers for any final plan of debt adjustment it will submit to U.S. Bankruptcy Judge Meredith Jury next month, that only an audio recording would be available. The decision, Mr. Parker wrote in an email Tuesday night, was made by school Superintendent Dale Marsden, whose San Bernardino City Unified School District both hosted and paid for the event and facilitator, because that facilitator was concerned participants would not speak candidly were it televised live—a decision that appeared to do more harm than good: it outraged Council Members and residents on both sides of the political aisle that divides San Bernardino citizens—or, as one city resident wrote: “We have been told repeatedly that our involvement in the Plan of Adjustment is critical to the success & implementation…Why the decision on this is not at city level is baffling. Why you have decided contrary to the city administration request to televise is mind numbing. The decision to not televise damages the credibility of the process and further amplifies the growing apathy in our city.”

Citizens’ Great Stakes in Municipal Bankruptcy

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February 26, 2014
Visit the project blog: The Municipal Sustainability Project

Blueprint for the Motor City’s Future. The newly retired judicial architect of Detroit’s fiscal future, Judge Steven Rhodes—honored yesterday in the Motor City along with his colleague, U.S. Chief District Court Judge Gerald Rosen and former emergency manager Kevyn Orr―noted: “The residents of the city had a great stake in the outcome of the case, a personal stake, each and every one of them…This is something that we in the bankruptcy court are totally unfamiliar with.” Judge Rhodes also cited another key element or outcome of the historic case, noting that, at his urging, Detroit’s bankruptcy reorganization spurred an agreement between city and suburban leaders to regionalize the governance of Detroit’s water and sewerage department (of which one component remains unfinished): “We have to find a way to build upon the momentum for regional cooperation …I think that is essential to the ultimate success of the city, and the region and the state.” Judge Rhodes, without his electric rhythm guitar, nevertheless made clear he was “very optimistic and enthusiastic about the city’s future: All of the ingredients for success are there. The balance sheet has been fixed.” Judge Rhodes, as well as his two colleagues, also discussed their concerns and shared thoughts about the broader topic of fiscal sustainability, with Judge Rhodes noting he remains “deeply concerned” ― in the wake of his experience in the Motor City approving reductions in pensions and health insurance for more than 32,000 Detroit retirees ― about the unfunded pension liabilities of other cities, suggesting Detroit and other cities need to consider moving away from costly pension plans and transition employees towards 401(k)-style defined contribution retirement plans. Judge Rhodes cited publicized estimates that cities and counties have unfunded pension liabilities ranging between $1 trillion and $4 trillion: “It flies largely under the radar and it doesn’t get a lot of attention and it doesn’t get a lot of management, and I’m deeply concerned about that…Because that’s money cities don’t have that they have promised to their retirees, and I think that solution across the country, and including in Detroit, has to be at some point defined contribution (plans).” The retired bankruptcy judge’s remarks, which drew protests outside the event, reflected on the Motor City’s federally approved plan of debt adjustment, under which non-uniform retirees will receive reductions of a minimum of 4.5 percent, while police officers and firefighters realized reduced COLAs―with the reduced benefits scheduled to begin showing up in retirees’ pension checks in March. The plan of adjustment does retain a hybrid pension plan under which new employees contribute more to their retirement.

Judge Rhodes suggested Detroit missed a chance to exit the traditional defined benefit pension business altogether—a reflection with which Mr. Orr did not concur. Mr. Orr, asked whether it was a missed opportunity for the city, said: “I don’t think so…Our general services pensions are modest, $19,400 (per person) on average.” (Police and firefighters receive pensions that average about $25,000 a year, but they are not eligible to collect Social Security like other retirees.) Under its plan of adjustment, as approved by the federal bankruptcy court, Detroit was able to reduce its $3.13 billion unfunded pension liability by 54 percent to $1.45 billion through reduced benefits and the 20-year “grand bargain” infusion of $816 million in contributions from state taxpayers, private foundations, and donors of the Detroit Institute of Arts donors. The approved plan provided for significantly greater savings through its profound cuts in promised retiree health insurance benefits―from $4.3 billion to $450 million.

Taking Final Stock in Stockton. “We have spent the last several weeks finalizing dozens of complicated legal and real estate documents and making preparations for thousands of checks that must be issued for the effective date…The stigma of bankruptcy is lifted and we can move our city forward toward recovery,” Stockton City Manager Kurt Wilson said yesterday, as the California city formally exited municipal bankruptcy—nearly one thousand days after filing for federal bankruptcy protection in July of 2012. Stockton’s route to exiting municipal was profoundly different than Detroit’s, as there was no state takeover; rather the elected leaders, as in Jefferson County, Alabama’s municipal bankruptcy, remained in charge and accountable to the citizens throughout the process—and, as in Alabama—despite, rather than with any assistance—such as was provided to Detroit and Central Falls from their respective states. U.S. Bankruptcy Judge Christopher Klein had lifted the stay preventing Stockton from exiting bankruptcy last month on January 20th, saying during a hearing that Franklin Templeton was not likely to win on its appeal of his decision. Manager Wilson said Stockton has developed a long-range financial plan for the duration of the agreements in its approved plan of debt adjustment, some of which extend out to as far as 2053. Thus, today marks a successful $2 billion municipal financial restructuring. Mr. Wilson and the city’s legal team will be in Judge Klein’s courtroom today for what is expected to be a routine conference updating the status of Stockton’s case, noting that the work in the city over the past three weeks to put the city’s plan of debt adjustment approved by Judge Klein into effect has been “heroic,” adding it has involved dozens of people, “not only people working on behalf of the city, but also people working on behalf of creditors. These are incredibly complicated transactions, and we were doing all of them and trying to get them completed on the same day.” Mr. Wilson said Stockton gave top priority to the 1,100 retirees who gave up some $544 million in lifetime medical benefits as their part or contribution in helping Stockton put together its plan of debt adjustment—with the final agreement providing the retirees a $5.1 million payout instead. Checks were mailed to retirees at the beginning of the week, with Mr. Wilson noting: “We’ve heard very clearly from some retirees that every day of delay has been a hardship…We made those a priority over everything else. They are ahead of everybody else.” Nevertheless, the city’s long municipal bankruptcy still will have another chapter: Franklin Templeton, the financial behemoth which had lent Stockton $36 million for a variety of projects in 2009, but which will receive only $4 million under the city’s approved plan of debt adjustment, is appealing Judge Klein’s decision to the 9th U.S. Circuit Court of Appeals—albeit, the appeal will not affect Stockton’s implementation of its restructuring plan. Mr. Wilson did note that few will discern any bright line etched in the sand of the precise moment in time when Stockton becomes a formerly bankrupt city; nevertheless, he remarked, it is a significant milestone: “We understand we’ll be under the microscope for every financial transaction we make for the next few decades…You’d be hard-pressed to find another city that has a handle on its finances going forward the way we do.” He added that it will be incumbent upon the city to make difficult spending choices going forward, even to deny increasing expenditures on universally popular services if those financial outlays do not fall within Stockton’s long-range economic projections: “In the past, the city sometimes made financial decisions based upon how worthy a cause was…The city used to make decisions where if something was worthy, just do it. We’re no longer in a position to just do it…We have to either make it fit into our model or reduce some other expenditure to get there. That will be difficult for people who say, ‘Hey, we’re out of bankruptcy.’ The reality is, where we were before bankruptcy was an unstable place.”

Hard Choices. San Bernardino, unlike Detroit, has no state-appointed emergency manager to make hard choices about the city’s difficult road to bankruptcy recovery—nor can it count on any assistance from the state. Nevertheless, it does appear that City Manager Allen Parker’s team might have the fiscally stressed city on the verge of a significant turnaround―a turnaround that marks a signal change in fiscal direction critical to the city’s hopes of completing and submitting its plan of debt adjustment to the federal bankruptcy court in three months—and to the city’s future sustainability. As Mr. Parker notes: “We stopped the bleeding…Revenue just exceeded — just by a bit — what we projected, and we were able to contain costs, so we’re on schedule to finish the year in the black.” Thus, the San Bernardino City Council has unanimously approved adjustments to the city’s budget—adjustments which are projected to actually provide for a small surplus, in part made possible by the politically difficult choice to shut three of the city’s five pools to the public this summer. However, as Assistant City Manager Nita McKay notes, even with the hard choices, the city’s successful efforts to balance its budget is different than in a normal, municipal budget process, because it relies upon the city’s chapter 9 filing as a key protection to prevent creditors from suing the city for money owed to them: “It is important to note that the city’s balanced General Fund budget for the fiscal year is made possible because the city is under the protection umbrella of Chapter 9 bankruptcy.” Moreover, City Manager Allen Parker warned there is as much as $15 million the city “hasn’t figured out how to pay yet.” With the ever-approaching May 30th deadline for the city to file its plan of debt adjustment with U.S. Bankruptcy Judge Meredith Jury, the city reports its sales and use tax revenue is expected to continue to climb to the highest level since 2006-07, which, along with property tax and administrative civil penalty revenue increases, are projected to provide the city $1.3 million toward $2.8 million in expenditure increases—leaving a surplus of about $113,000, with no reserves, according to budget documents. San Bernardino lists $5.2 million in “salary savings,” or money budgeted for positions that are now vacant. It is now trying to fill some of those positions, particularly police and firefighters, Ms. McKay said. Nevertheless, San Bernardino confronts significant budget burdens, including some $2 million for increased firefighter overtime, unanticipated, because, according to Mr. Parker, there was a three month delay before cuts to the Fire Department that were supposed to take effect last July 1st actually became effective. The city also approved general fund increases of $600,000 for 36 new police vehicles, $190,000 in part-time hours for the Parks and Recreation Department, $25,000 for Code Enforcement and $12,000 for the city treasurer’s office. The Council rejected, 4-3, a motion to add $60,000 to keep the other three pools open—notwithstanding a councilmember’s argument that these pools are the type of quality-of-life issues residents depend on a city for and that attract businesses, with Councilmember Valdivia noting the affected pools would be in minority areas. But, in rejecting the motion and noting the chapter 9 hanging over their heads, Councilman Fred Shorett responded that while a good argument could be made to keep pools open, and to reverse any of a number of cuts to “sacred cows” the city has made during bankruptcy; San Bernardino needed to put money toward paying deferred costs and emerging successfully from bankruptcy, adding: “I can balance my budget, too, if I don’t pay my cable bill or my gas bill or my electric bill.” In a sobering note, Councilmember Valdivia had requested staff to provide his colleagues with a summary of the municipal bankruptcy costs the city has accumulated since it filed for federal protection nearly three years ago: more than $9.3 million. Without those bankruptcy-related services, the city would have to pay significantly more than $9 million as creditors came after it, said Parker and City Attorney Gary Saenz.

The Ineluctable Challenge of Weighing a City’s Past Versus its Future

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February 20, 2014
Visit the project blog: The Municipal Sustainability Project

Electronic Musical Chords. Nathan Bomey of the Detroit Free Press yesterday did a terrific interview with U.S. Bankruptcy Judge Steven Rhodes, with Judge Rhodes telling him he never believed the City of Detroit had to choose between paying its creditors or reinvesting in services. Judge Rhodes noted that cuts to Detroit’s pensioners and bondholders were necessary, but said that without a feasible plan to place the city on a financially sustainable path, retirees and financial creditors would have fared worse down the road, so, he said: “[T]he goals of satisfying the interests of creditors and satisfying the interests of the residents in my view were never in conflict…In fact, they were symbiotic. In order for creditors to be repaid, there had to be a vital city:” Please note I have taken the liberty of highlighting some of Judge Rhodes’ responses, as they seem especially insightful.

QUESTION: Do you think Detroit’s collapse was an isolated incident or does it portend a broader crisis of some sort?
ANSWER: It was in some senses unique to Detroit and in some senses a part of a national phenomenon. The part that’s national is the economic factor of it, the decline of manufacturing generally in this country and the migration of what manufacturing remains really out of the Rust Belt.
Q: And our unique amount of mismanagement and perhaps even corruption?
A: We did have obviously one corrupt mayor. It’s hard for me to judge how much of the city’s issues are directly attributable to that.
Q: You chose Judge Rosen to be your mediator. What was the reasoning behind that?
A: I was convinced of the importance of mediation and a mediated and negotiated settlement to the prompt disposition of the case. And I also felt that the prompt disposition of the case was essential to the city’s revitalization.
So I felt it was necessary to appoint the strongest possible mediator that I could. And I felt that Chief Judge Rosen had all of the necessary qualities. Weight of office. Weight of personality. Commitment to the city. Personal and professional contacts. Political contacts. He was the right person.
Q: Early on you set a really expeditious pace for the case.
A: I didn’t really perceive of it as expeditious. I perceived of it as what was necessary given the circumstances of the case.
Q: Is it accurate to say that you prioritized the health and welfare of the people of Detroit over the repayment of creditors?
A: Everyone in the state had a personal stake in the outcome of the case. Even more specifically, in order for any plan to be feasible, the city had to develop a plan by which it could deliver municipal services adequately.
So the goals of satisfying the interests of creditors and satisfying the interests of the residents in my view were never in conflict. In fact, they were symbiotic. In order for creditors to be repaid, there had to be a vital city.
Q: By the time Detroit filed for bankruptcy, were pension cuts inevitable?
A: Inevitable’s a pretty strong word. I would say very highly likely.
Q: People blamed Kevyn Orr and perhaps even you for cutting pensions. But in reality, the promises to pay those pensions had been broken many years ago.
A: The city did not have the resources in its pension plans to fulfill its obligations to pensioners. There really never was much dispute about that.
Q: But from a legal perspective it wasn’t a difficult call for you?
A: That’s true. We in bankruptcy impair contracts all day, every day. That is what we do.
Q: No municipal bankruptcy judge had had to decide that question or been willing to decide that question. Was there hesitancy that you’re going to be the first?
A: There was always going to be lots of groundbreaking in the Detroit case. It is certainly true that there was not a lot — or sometimes even any — precedent for the legal decisions I had to make.
Q: Former Mayor Kwame Kilpatrick’s $1.4 billion debt deal, executed in 2005 and 2006, was a disaster for the city. Was it the point of no return financially?
A: Yes. I have said the city should have filed for bankruptcy then and perhaps even before then.
Q: The governor has said he was always representing each individual person in Detroit. Was democracy suspended in Detroit?
A: The people lost the ability to have the direct impact that they have when there’s a mayor and a City Council in charge when the emergency manager was appointed. That’s a taking away of democracy to that extent.
Q: But you never felt that the law was unconstitutional obviously.
A: I did not. And really, primarily for the reasons that Gov. Snyder identifies. The democratically elected Legislature passed this law. The governor signed it. The city is an arm of the state. And it is always subject to state law.
Q: One of the most surprising moments of the bankruptcy was when you killed the second swaps settlement. There was a gasp in the courtroom. Did you hear it?
A: I can’t say that I did. But I was not surprised that they were surprised.
Q: Your relationship with Detroit emergency manager Kevyn Orr seemed complicated. At times you chided him. But also you’ve praised the job that he did. What is his legacy in Detroit?
A: I hope his legacy is that he took on an enormous and some might say impossible challenge and met that challenge with grace, dignity, professionalism, and proficiency. Of all of us who were challenged by Detroit’s insolvency, he had the most challenging and difficult job of all.
Q: How much credit does Gov. Snyder get for authorizing the bankruptcy?
A: A lot of people maintain that it was a very courageous thing for him to do and that it was something his predecessors were not willing to do and did not do. From an economic or fiscal perspective, it doesn’t seem to me it was a very hard decision. As I’ve said, it should have been made a long time ago. Politically, on the other hand, I’m sure it was hard for him.
Q: When did you first hear about the concept of the grand bargain?
A: I remember Judge Rosen sketching it out for me in the broadest details after he had the parties on board in concept, but I’m not sure I can tell you precisely when that was.
Q: Mr. Orr has said he was skeptical at the beginning. Some people withheld judgment. What was your initial reaction? Did you think it was doable?
A: I had no basis to judge that other than the optimism that Judge Rosen was exuding. He was optimistic about it from the beginning, and so was I.
Q: It’s well established at this point that cities cannot be forced to sell assets in municipal bankruptcy.
A: Yes, that’s true.
Q: What would have happened had Kevyn Orr decided selling DIA property was necessary?
A: I would have needed to be persuaded.
Q: Because you said in your opinion the DIA and the attorney general would be more likely to prevail if there was to be an argument over this in court.
A: Not only was I persuaded of that, I was also persuaded of the necessity of maintaining the DIA and the art in the DIA intact to assist in the city’s revitalization.
Q: There were many who said we should prioritize pensions or services over keeping an admittedly wonderful art collection. How did you balance that from a philosophical and judicial perspective?
A: I understood that perfectly well. But here’s the thing about bankruptcy. Bankruptcy requires shared sacrifice. And the deeper truth than that immediate one that they were trying to express is simply this: Without a revitalized city, any pension promises that the city might make would be impaired.
A revitalized city was essential to any long-term promises that the city might make to any creditor, including the pensioners.
Q: Were there nights where you thought, I am going to have to cram down something here?
A: Oh yeah. I believed that until the last creditor settlement. Until FGIC and Syncora settled — those were the last two — I assumed and believed that they would not settle and that I would have to consider the city’s request to cram down the plan over their objections.
Q: Syncora in particular waged an extremely aggressive campaign against the city. At one point you even told both sides to stop using war analogies because it had gotten so intense. What did you make of their strategy?
A: They argued zealously, but they always did it with civility. And their arguments were well argued, well structured, well organized, well presented. They were really good lawyers. So I had no problems with the zealousness with which they advocated their position.
Q: Of course at the end of the case, when they attacked the ethics of the mediators, you were extremely upset.
A: I was. I felt that was totally unjustified. And I struck it, and I was prepared to consider sanctions until they apologized for it.
Q: How close did you come to sanctions?
A: Well, I would have been interested in what they had to say on why they shouldn’t have been sanctioned. But I felt like sanctions should be given very serious considerations and not minor sanctions either.
Q: How taxing was this case for you personally?
A: There were obviously times when it was extremely taxing for me personally. It was, for stretches and sometimes long stretches, very intense.
Q: We were all at news conferences where Judge Rosen was present and in some ways he was much more visible as a mediator than a lot of people expected. Were you worried about that at all?
A: Judge Rosen is a political animal in a way that I totally am not. So I had complete faith and trust in his political judgments as to what he felt he needed to do to fulfill his obligations as a mediator.
When I appointed him and he agreed to be appointed, I told him that his deliverable to me was a confirmable plan of adjustment in this case and he delivered that.
Q: How much did you coordinate with Judge Rosen during the case and how much did you know about what was happening in mediation?
A: At the beginning of the case, we agreed on two basic principles. The first was, I would keep pedal to the metal in litigation, and he would keep pedal to the metal in mediation, and we would run them in parallel with one important exception. If he recommended to me that I let off on the gas and apply the brakes to litigation, I would do that. I would follow his recommendation when he thought that would facilitate settlement.
There were also times when he thought it would facilitate mediation for me to advance litigation and to hold a hearing and to ask the hard questions of the lawyers to get them to realize what the strengths and weaknesses of their case were. I would do that.
Q: Did the city need $1,000-per-hour attorneys to run this case?
A: The question is for me whether their fees were reasonable or not and I’ve made my judgment about that.
Q: They could have made more money elsewhere, right?
A: I assume. The rates that they charged were in some senses for them below market rates because they did discount the ultimate fee that they charged to the city in many different ways. The city’s lawyers brought to the case an expertise that is very rare in this country.
Q: Did you believe that the city needed to account for the DIA’s value in some capacity in the plan? Could the city have executed a plan of adjustment without someone accounting for the value of the museum?
A: It did. The plan we have takes no account of the value of the art. So the answer to that question is yes. It gets back to the fact that what the city does with its property is entirely its own decision and not one that the bankruptcy court can exercise any control over whatsoever.
Q: Then the natural question is, was there a false crisis in the sense that the DIA was never really in trouble?
A: Well, the question you’re raising really is at what point in the process from beginning to end could or should that issue have been resolved.
If I had decided early in the case and teed up the issue of whether the art was in play or not, would we have gotten $816 million in a grand bargain? I’m not sure about that.

The Motor City’s Future. Michigan Governor Rick Snyder is considering options for the state to provide debt relief for the cash-strapped Detroit Public Schools (DPS)—a system with an estimated $55 million annual cost to finance its accumulating debt. Governor Snyder has proposed a $75 million distressed schools fund as part of his 2016 executive budget as part of a plan to help financially struggling school districts across the state, telling the legislature: “We are still evolving in terms of the best way to implement the entire program, but there are districts that need substantial readjustments in terms of their finances…I’d like to start establishing a reserve fund for financial resources to do the restructurings…I don’t view this is a bailout, but only where we’re truly solving problems in the long term.” Such a fund would be designed to help DPS cover debt payments, or shifting shift DPS into a new district, with the remaining bonds being serviced with an outstanding levy. The Governor’s strategy director, John Walsh, however, told the Detroit News: We’re not talking about [municipal] bankruptcy — the governor has been very clear about that…We have to find a method that will recognize that they can’t bear the weight [of their debt].” Because the school system is not part of Detroit’s budget, its financial distress was not addressed in the Motor City’s plan of debt adjustment—nor was it part of the so-called “Grand Bargain,” they magic elixir to the city’s obtaining U.S. Bankruptcy Judge Steven Rhodes’ blessing of its largest in U.S. history municipal bankruptcy exit plan. Nevertheless, it is difficult to imagine a more critical criterion to the Motor City’s future than the recovery and financial and educational stability and competence of its school system. It will be key not only to any hope of reversing the unprecedented decline of the city’s population, but also to its future. In Detroit, the challenge is especially daunting: according to the Ann E. Casey Foundation KidsCount report, Detroit continues to have more children living in extreme poverty than any of the nation’s 50 largest cities: More than 59 percent of Detroit children lived in poverty in 2012, the most recent year for which data is available—an increase of 34 percent since 2006. It is, in some ways, a microcosm of the state, where one in four children live in extreme poverty, according to the report—itself an increase of 35 percent over six years, to nearly 25 percent―a devastating percentage which some attribute to steep cuts to social services. The other side of such decreases, one may observe, imposes a double whammy: huge increases in burdens on the City of Detroit―reports of child abuse and neglect increased 77 percent in Detroit from 2008-12, with about 15 percent of Detroit children living in homes that have been investigated by child protection workers: confirmed neglect or abuse increased 40 percent. The death rate for young people ages 1-19 increased 14 percent between 2004 and 2012, mostly because of increased homicide and suicide among teenagers―and a devastating and discouraging message to families with children that might be considering moving to Detroit. Fortunately, the Casey Foundation report showed improvements in some measures of well-being:
• The number of children in out-of-home care decreased 71 percent in Detroit, and 33 percent statewide.
• Births to teens aged 15-19 decreased 13 percent in Detroit, and 16 percent across the state.
• The number of fourth-graders scoring “not proficient” in reading declined 24 percent in Michigan, and 16 percent in Detroit, from the 2008-09 school year to the 2013-14 school year.
The Motor City’s public school system carries roughly $2.1 billion of debt, of which approximately 75% is unlimited-tax general obligation bonds secured by Michigan’s School Bond Qualification and Loan Program. Another $325 million is long-term state aid revenue bonds, secured by an intercept feature on state aid; and $108 million is in the form of loans from the Michigan School Loan Revolving Fund, according to Moody’s Investors Service. In 2013, fixed costs, including debt service and retirement costs, made up 35% of operating revenue and were expected to grow at least 3% or more in fiscal 2015, according to Moody’s, which maintains junk ratings and a negative outlook on the district. The Detroit School District faces a $170 million deficit in fiscal 2015.

Don’t Rush to Bankruptcy Judgment. A week after pushing Detroit neighbor Wayne County, Mich. to junk territory, credit rating agency Standard & Poor’s analyst Jane Ridley yesterday wrote it is premature to “start treating Detroit’s neighboring municipality as if it were about to file for municipal bankruptcy: As we recently saw in Detroit, bankruptcy is a significant issue, with serious potential repercussions for bondholders. We take very seriously any possibility of bankruptcy, but we don’t want to rush to judgment before letting the process to take its course.” Nevertheless, Ms. Ridley wrote S&P could change its view of the likelihood of municipal bankruptcy if Michigan were to appoint an emergency manager, based upon the experience of the accelerated transition from Gov. Snyder’s appointment of Kevyn Orr to Detroit’s filing for federal bankruptcy protection…if past is prologue: “While many consider it a positive step to bring in a third party who has powers to make changes, such as the Emergency Manager option, given Detroit’s recent experience and very rapid move to bankruptcy, our view on the county’s trajectory could well change with the appointment of an emergency manager.” Last Friday S&P downgraded Wayne to BB-plus from BBB-minus, with a negative outlook―costing the county its final investment-grade rating; Moody’s moodily had at the beginning of the week dropped the county three notches to junk. The respective downgrades came in the wake of newly elected County Executive Warren Evans’ warnings when he took office last month that Wayne County is on a trajectory to run out of cash by August 2016 and that municipal bankruptcy or state takeover are on the table without major financial fixes.

Tense Futures & Pasts. For every municipality in severe fiscal distress, the challenge between the past and the future—between public pension obligations versus capital investment for a sustainable future can best be described as a nightmare. For instance, in Stockton, as U.S. Bankruptcy Judge Christopher Klein opined, notwithstanding the Golden State constitution, the federal chapter 9 municipal bankruptcy law trumps the state constitution protection of public pension contracts. So there was a legal basis—as there is, with, presumably, U.S. Bankruptcy Judge Meredith Jury’s acquiescence―but there is a harsher reality. Not only are there unique attributes to California’s CalPERS public retirement system vis-à-vis municipalities, so that, for instance, had Stockton, in its proposed plan of debt adjustment, opted to include reductions in pensions; CalPERS would have cut pensions a little more than half for current retirees and employees in order to avoid having other California municipalities being forced to subsidize Stockton: CalPERS had no authority under state law to cut by a lesser percentage. Even as it was—and is in San Bernardino, which faces a similar quandary with regard to its public pension obligations to CalPERS—any action to cut pensions would likely have rendered Stockton far less competitive in its ability to attract qualified recruits to its public safety departments—a critical factor for cities in distress which, more often than not appear to have disproportionate rates of violent crime—a vital issue to address in any plan of adjustment or municipal bankruptcy recovery plan. So, for example, San Bernardino ranks as a city with one of the highest violent crime rates in California, should the city, as part of its developing plan of adjustment, opt to impair its CalPERS contract, technically employees would have 6 months to find another CalPERS job (state law)—under California law such individuals would be deemed “legacy” or “classic” employees: that would enable their retention of their current pension formulas with their new employer; however, if they were unable to find another job until after 6 months, they would then be deemed a “new” employee in CalPERS and take a significantly reduced pension benefit. This complex state-local dilemma narrows—an understatement—a California city’s options. In San Bernardino, the city had already lost 100 police officers due to compensation reforms prior to its filing for municipal bankruptcy protection—even though, on too many days, the city has been in Code Blue―that is, only responding to crimes in progress. It is, thus, nearly impossible to contemplate what would the impact on the city’s public safety would be were it to propose—as part of its plan of debt adjustment due in May to Judge Jury—adjustments in its public pension obligations. Would the city risk losing another 100-150 police officers? What would be the chances of the city to attract highly qualified replacements? What might be the impact on families—either those weighing whether to stay—or, much less, those who might be considering moving to San Bernardino? This is part of the intractable imbalance in municipal bankruptcy between a city’s obligations to its municipal bondholder creditors—vital capital, after all, and its employees and retirees: to its most critical goal in putting together its plan of debt adjustment: to transition back to service solvency. But as one reader aptly notes: “creditors don’t care about this fact and don’t understand it…the need, for a municipality, to be a viable employer is critical to ensuring service solvency.” That can be especially true in the Golden State, where, currently, it takes 100 applicants to get a single police officer.

Unappealing Options. Jefferson County, Alabama Commissioner George Bowman and several litigants who filed an appeal of the decision approving the county’s municipal bankruptcy plan of debt adjustment on behalf of ratepayers on the county’s sewer system yesterday wrote Alabama Gov. Robert Bentley and Attorney General Luther Strange requesting they intervene in the appeal of Jefferson County’s municipal bankruptcy case, writing that the Governor and Attorney General should “do their job to protect the public interest by joining in the existing appeal.” Commissioner Bowman said they hope to meet with Governor Bentley and the AG to discuss a number of issues raised in the appeal, including their apprehensions with regard to the plan’s proviso that the federal court oversee implementation of the plan — and sewer system rate increases — for the next 40 years. The appeal promises to add to the hefty price tag for Jefferson County taxpayers: Jefferson County has already expended close to $30 million for its bankruptcy—a price that is certain to veer upward with the appeal. In their appeal, the litigants claim the federal oversight violates Alabama’s rights in violation of the U.S. Constitution. Commissioner Bowman opposed the County’s decision to file for municipal bankruptcy protection in 2011; he also voted against the county’s plan of adjustment or exit plan which U.S. Bankruptcy Judge Thomas Bennett approved a year ago last December—a plan which authorized Jefferson County to issue $1.8 billion of sewer refunding warrants to write down the county’s debt, and exit what was, at the time, the largest municipal bankruptcy in U.S. history. Commissioner Bowman complains that the federally approved plan of adjustment burdens some of Jefferson County’s poorest citizens with 40 years of sewer system rate increases which he believes they will be unable to afford, warning that over the next forty years rates will increase 471% to service the sewer refunding warrants that have been issued. U.S. District Judge Sharon Blackburn has previously rejected the claim by Jefferson County that because the plan of debt adjustment has already been implemented the appeal is moot; Judge Blackburn made clear she has discretion to overturn various provisions in the plan of adjustment—both issues on which Jefferson County has appealed to the 11th U.S. Circuit Court of Appeals.

Underwater in Puerto Rico. Moody’s has downgraded Puerto Rico’s general obligation rating to Caa1 from B2, reporting that the territory’s anemic growth is harming tax revenues—imperiling the Commonwealth’s liquidity. The gloomy, if moody assessment comes as the U.S. House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust law readies its hearing next Thursday on draft federal legislation to allow Puerto Rico government-owned corporations to restructure their debts under Chapter 9 municipal bankruptcy. The hearing comes amid increasing apprehension that the Twilight Zone for U.S. territories—which are neither states nor municipalities—leaves them no options for bankruptcy protection—unlike every other corporation in the U.S. The Commonwealth of Puerto Rico has said that while it supports amending Chapter 9, it fears that waiting for Congress to act could be like waiting for Godot. Moody’s downgrade now drops the island lower than S&P’s and Fitch’s most recent reassessments. Moody’s Caa is used for state and local bonds in “poor standing and subject to very high credit risk.” Moody’s analysts Ted Hampton and Emily Raimes wrote in yesterday’s report that tax revenue shortfalls, because of sluggish economic growth, may harm the Commonwealth’s liquidity; they noted that General Fund revenues have been coming in 2.5% below projections through the first 7 months of the fiscal year: “In view of still anemic economic trends, the revenue gap could widen after April income tax payments…Puerto Rico’s Economic Activity Index as of December was down 1.4% on a year-over-year basis.” The dynamic duo also noted apprehension about Puerto Rico’s ability to issue new debt to would shore up liquidity, adding that Puerto Rico anticipates a 35% increase in debt service in FY 2016―even more daunting will be the subsequent years as rising debt service requirements impose an ever increasing burden―noting that the Commonwealth’s debt burden is high compared with U.S. states: Puerto Rico’s adjusted net pension liability was 223% of revenues compared with a U.S. state median of 60% of revenues: “Downgrades of some ratings to Caa2, a notch below the commonwealth’s GO rating, reflect the vulnerability of pledged revenues to a constitutional provision that provides a claim in favor of general obligation bondholders.”