August 27, 2015
Schooling in Muni Bankruptcy. Paul Vallas, CEO of the Chicago Public Schools (CPS) from 1995 to 2001, this week warned that were CPS to file for municipal bankruptcy—should the legislature authorize municipal bankruptcy in Illinois as proposed by Governor Bruce Rauner—that could devolve CPS, whose credit rating has been reduced to junk status by Fitch, into a financial “death spiral.” Mr. Vallas warned that such a filing would lead to an exodus of students from the system, which, in turn, would trigger a decline in state aid—in effect triggering a vicious fiscal cycle. Gov. Rauner, in proposing authorization of chapter 9 for Illinois municipalities has said CPS would be a good candidate for such a filing. The warning came as Mayor Rahm Emanuel’s CPS school board yesterday unanimously approved CPS’s budget, relying heavily on borrowed money and the hope of a nearly $500 million bailout from the legislature—a legislature which appears to be in a semi-permanent stalemate. Absent the assumed state aid, CPS will have few options but to make searing cuts in January. The $5.7 billion spending plan contains another property tax hike — an estimated $19-a-year increase for the owner of a $250,000 home — as well as teacher and staff layoffs. The CPS budget action came as the Chicago Board of Education also prepared to issue $1 billion in municipal bonds and agreed to spend $475,000 so an accounting firm can monitor a cash flow problem so acute that CPS considered skipping a massive teacher pension payment at the end of June. Mayor Emanuel’s new choice for board president, former ComEd executive Frank Clark, summed up the financial peril: “This is much like, in your personal lives, if you begin to have revenue shortfalls…you start living off your credit cards…And you can do it short-term, but sooner or later, those credit cards max out and you’ve got yourself in a very serious situation. That’s where CPS finds itself today: It is a budget that keeps us going today. It is not a sustainable approach long-term.” Indeed, the more than 8 percent hole in the adopted budget leaves little option but for Mayor Emanuel and new CPS Chief Forrest Claypool to try to get Gov. Rauner and the legislature to enact changes to CPS’ teacher pension obligations. On the reality front, CEO Vallas asked: “Who wants to send their kids to a bankrupt school district?” He warned that litigation and potential teacher strikes could “totally destabilize the system which means people would flock away from the system which means you would put the system in a financial death spiral,” adding: “At the end of the day bankruptcy is literally the kiss of death…that would decimate the finances so it’s simply not an option.” Chicago Civic Federation President Laurence Msall described the proposed CPS budget as “[Y]et another financially risky, short-sighted proposal and [one which] fails to provide any reassurance that Chicago Public Schools has a plan for emerging from its perpetual financial crisis…If stakeholders do not come together now to develop a multi-year plan, the Federation is deeply concerned that CPS could fail, with devastating consequences for the future of Chicago and Illinois.”
To Be or Not to Be. With Gov. Alejandro García Padilla theoretically set to release a fiscal stability and economic development plan for Puerto Rico’s future next Monday, there has been increased discussion of the cancellation of the Puerto Rico Aqueduct and Sewer Authority’s (PRASA) bond offering, apparently out of apprehension with regard to global market conditions and an apparent lack of investor appetite for the municipal bonds—but without any official statement released on a change to the status of the sale, either from PRASA officials or from the Commonwealth. In addition, the U.S. territory has asked the U.S. Supreme Court for a ruling to overturn a ban which prevents Puerto Rico public agencies from restructuring, seeking permission for the right to restructure its debt — which has reached $72 billion — under its own quasi-bankruptcy law. The uncertainty came as Nuveen yesterday noted: “The Government Development Bank reports liquidity sufficient to operate until November…In addition, the Department of Justice has designated Puerto Rico a ‘high risk grantee,’ requiring Puerto Rico to account for how it spends federal funds going forward.” Yesterday, in addition, Moody’s added: The PRASA postponement of a $750 million bond offering after repeated delays “shows the difficult obstacles blocking Puerto Rico’s capital market access…Investor sentiment has deteriorated sharply since the commonwealth’s last public offering almost a year and a half ago. If underwriters can eventually complete the PRASA sale, it may signal a return to some degree of market access that would help maintain liquidity.” If anything, with Puerto Rico impinging on its self-set August 31st deadline to reveal its plan to restructure its staggering $72 billion debt, the island likely is opting not to move ahead with its controversial proposal to borrow an additional $750 million to pay for PRASA improvements—likely out of at least some apprehension it could not borrow the money — by issuing bonds — at an affordable interest rate. Adding to the messy situation, a working group, appointed by Gov. Garcia Padilla, has been trying to put a proposal together for several months; however, Puerto Rico’s main opposition party has dropped out of the group—raising grave doubts about any consensus. The PRASA debt issuance cancellation is more worrisome—as the utility provides essential services and is authorized to increase rates, within reason. Moreover, the utility’s bondholders have a first claim on its revenues: they are authorized to bring in a receiver to enforce collections.
A Post Muni Bankruptcy High? Recovering from municipal bankruptcy is like recovering from surgery. There are scars, but lessons learned. Thus, as post-bankrupt Stockton continues its comeback, City Attorney John Luebberke notes: “The City Council’s goal is to pursue the betterment of the community…Now that we’re out of bankruptcy, we can pursue some of these opportunities. Even in an era of constrained resources, we’re going to do what we can to improve the community.” One action, in which Mr. Luebberke is taking a lead role, is to enforce the city’s medical marijuana ordinance. Thus, post municipal bankruptcy Stockton last week filed two lawsuits last week aimed at preventing a pair of medical-marijuana dispensaries from operating in Stockton in violation of a city ordinance. While one has closed, the other—Collective 1950—will remain open while the city’s lawsuit is being adjudicated, with court dates not scheduled until mid-January. Mr. Luebberke said it is uncertain whether Stockton initially will seek a temporary injunction to immediately close Collective 1950 or choose to gain permanent injunctions from the court against Collective 1950 and Elevate Wellness. For Stockton, the issue of municipal enforcement of Stockton’s medical-marijuana ordinance is complicated by California’s “Compassionate Use Act,” which allows for marijuana use and possession for medical reasons—whilst Stockton’s ordinance is focused on preventing unregulated dispensaries from selling to minors and seeks to reduce the potential for “nuisances” and crimes associated with the presence of the facilities, according to Mr. Luebberke. According to Stockton’s lawsuits, the city can enforce its municipal code by “public nuisance abatement,” “civil injunction,” and “civil penalties of up to $1,000 per day of violation.”
First Chapter 9 since Detroit. Some of the first transatlantic passengers to come to America on the Arbella—passengers who left England in 1630 with their new charter–had a great vision. They were to be an example for the rest of the world in rightful living, or as then Gov. John Winthrop put it: “We shall be as a city upon a hill, the eyes of all people are upon us.” But there is a different perspective from Hillview, the small Kentucky municipality which last week filed for chapter 9 municipal bankruptcy in the first municipal bankruptcy since Detroit, with Rick Cohen noting: “With its Chapter 9 filing, Hillview may have liabilities of around $100 million, against assets potentially only as much as $10 million…There may be a reason that Hillview found bankruptcy preferable to paying out, even at a lower rate than the court ordered, to the trucking company.” His thesis, referring to Moody’s report this month: “Municipal Bankruptcy Still Rare, but No Longer Taboo,” notes that Moody’s Senior VP Al Medioli appears to find that recent chapter 9 decisions have treated public pensioners “as a group above other creditors, and that further places pensions on a higher plane above all other liabilities, regardless of bond security or legal revenue pledge.” He notes that Kentucky confronts an unfunded pension liability of over $9 billion, making it the nation’s least well-funded state pension system, albeit he confesses there is insufficient information with regard to Hillview’s pension obligations that might have been affected by the municipality’s bankruptcy filing and potential proposed plan of debt adjustment.
Stately Oversight. In a brief released yesterday by Pew, the organization determined that New Jersey’s long track record of “strong state oversight” has, at least to date, been a key factor in fiscally protecting Atlantic City from being forced into municipal bankruptcy. Noting that the Garden State established its first fiscal oversight program in 1931, the report finds that the state has taken an active role to prevent municipal defaults and bankruptcies: Camden, before the state intervened with additional funds to help the city meet its obligations, came close in 1999 to becoming the first New Jersey municipality to file for Chapter 9 since Fort Lee in 1938, noting that New Jersey’s “tradition of intervention” is a stark contrast to other states such as California and Alabama which leave it up to local governments to resolve their own fiscal challenges, noting: “Most states tend to react to distress when it’s too late and not be proactive and that is not the case with New Jersey.” The report adds that Atlantic City also has benefited this year from New Jersey’s Municipal Qualified Bond Act, which allowed it to issue $43 million in general obligation bonds to cover repayment of a state loan for refinancing $12.8 million in bond anticipation notes. Atlantic City also received a $10 million increase in state funds this year under the state’s transitional aid program designed to assist distressed local governments. Pew cautioned, however, that while New Jersey has a strong record of avoiding municipal bankruptcies, no municipality in modern times has experienced close to the city’s 64 percent tax base decline, driven largely by casino closures from increased regional gambling competition, noting that the state still might be forced to “bail the city out” if it is to avoid filing for municipal bankruptcy—adding that such a rescue could be manageable given Atlantic City’s relatively small size.