The financial troubles and subsequent attempts/talks of a second run at filing for municipal bankruptcy in Harrisburg, PA have taken many twists and turns. The latest wrinkle came this week in the form of the first-ever Securities and Exchange Commission charges of security fraud, charges the city in question has agreed to settle, against a municipality.

The SEC alleges the city’s officials made a series of “misleading public statements” regarding its financial condition in various places: its budget report, annual and mid-year financial statements, the mayor’s “State of the City” address. The agency noted that such failures of compliance and “misstated” information  left creditors with little in the way of reliable information when assessing the city, notably from 2009 through 2011.

“In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances,” said SEC’s George Canellos. Harrisburg notably missed $13.9 million general obligation debt service payments on March 15.

In 2011, Harrisburg’s city council defied the wishes of the state and its own mayor by voting to file for Chapter 9 bankruptcy. Supporters of doing so said it would give the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project, once so wrongly predicted to be a financial windfall for the city (the SEC listed debt from the project at $260 million), and provide more of a fair option to local taxpayers that didn’t want to take a hit out of proportion to that of investors. State and mayoral plans to sell off city assets such as parking garages and the incinerator operation, as well as raise taxes, were rejected by the council. Still, Harrisburg’s filing was rejected when a judge upheld a hastily-passed Pennsylvania law aimed at temporarily blocking third-level cities in the state from filing.
 
- Brian Shappell, CBA, NACM staff writer

The Third Circuit has long been perceived as the most efficient, and perhaps most filer-friendly, when it comes to corporate bankruptcies. Perhaps it's why the district is seen as the most likely choice for filings. However, the latest numbers from the U.S. Bankruptcy Courts note that business filings coming from the district place it only in third among the 11 districts.

Chapter 11 bankruptcy filings throughout the nation declined by more than 10% during a one-year period between the end of March in 2012 and this year. The total now sits at 9,811, down from March 2012’s 11,339. The total of all types of bankruptcies also dropped by more than 10% to 1.17 million. Still a tiny percentage overall, Chapter 9 (municipal bankruptcy) filings increased to 20 between March 2012 and March 2013 from 13 during the previous 12 months.

Within the numbers, the Ninth District (West Coast) far and away had the most filings for the period at 2,418, down significantly from the 3,188 last year. It was followed the Eleventh Circuit (FL, GA, AL) with 1,288 and the aforementioned Third Circuit (located in Delaware and including NJ and PA) at 1,213. The lowest total of filings, excluding Washington, D.C., came out of the Eighth District (AR, IA, MN, MO, NE, ND, SD) with just 317.

-Brian Shappell, CBA, CICP, NACM staff writer

It appears officials and legal representatives from a California community recently deemed eligible to file for municipal bankruptcy protection under tough California mandates may have forced previously uninterested creditors back to the negotiating table with its most recent legal victory.

It was reported this week that the city of Stockton and key creditors in its Chapter 9 bankruptcy case, the largest on record from a U.S. city, have told a judge they are willing to resume negotiations that previously failed. Stockton essentially wants concessions from some creditors to which they owe. Similarly, the community of Central Falls, RI also forced stakeholders to yield and take a “haircut” – in that case, public employees and retirees over pensions benefits – after its Chapter 9 began moving successfully through the courts there.

About a month ago, U.S. Bankruptcy Judge Christopher Klein ruled Stockton did meet the threshold to officially enter into municipal bankruptcy. The key pieces to the decision was that Stockton is, in fact, insolvent and that it went through the good-faith negotiation processes mandated by the 2011 California law designed to slow the number of such filings. While the judge didn’t dismiss the bondholders’ problem with creditors taking a haircut while Stockton continued to make full contributions to the state pension program (CALPERS), Klein did determine that an eligibility proceeding wasn’t the right time for such arguments to be made.

Stockton is among many U.S. cities, including several others in California, struggling to get out of crushing debt wrought by factors including expensive union contacts, pension payments and tax base shrinkage caused by the real estate collapse, for which Stockton once boasted the nation’s second-highest foreclosure rate.

-Brian Shappell, CBA, NACM staff writer

After reviewing arguments from last week from Stockton, CA officials and creditors’ representatives, a bankruptcy judge has ruled that the struggling city is eligible to file for Chapter 9 bankruptcy. However, the judge did little to immediately clear up other points of contention or explain the basis for how he ruled.

U.S. Bankruptcy Judge Christopher Klein ruled Stockton did meet the threshold, even one heightened by a 2011 change trying to slow potential filings, to officially enter into municipal bankruptcy. However, there was little explanation released publicly Monday to explain the decision nor was there clarity provided on the issue of renegotiating pension terms.

“There’s no explanation yet, just an order held that they were eligible,” said Bruce Nathan, Esq., of Lowenstein Sandler LLP. “It seems unknown what the court based its decision on, as a number of requirements were litigated here. So, it’s vague what the court did other than to say that it holds a Chapter 9 is usable.  It’s almost anti-climatic at this point.”

Arguments wrapped last week in the case, which is one of the first to include potential plans to not only slash retiree and pension benefits, but also short bondholders, creditors and other insurers. Representatives for the city officially filed for Chapter 9 protection in federal court in the state capital of Sacramento in June 2012. Negotiations since that time, mandated by a then-new California state law requiring attempts to work out solutions without court judgments or hastily-considered filings, failed.

Stockton is among many U.S. cities, including several others in California, struggling to get out of crushing debt wrought by expensive union contacts, pension payments and tax base shrinkage caused by the real estate collapse, for which it boasts the nation’s second-highest foreclosure rate.

-Brian Shappell, CBA, NACM staff writer

Still ignoring media coverage of Chapter 9 (municipal) bankruptcy filings? That may not be a sound strategy given the findings of a new Pew Charitable Trusts study.

Pew’s report, A Widening Gap in Cities: Shortfalls in Funding for Pensions and Retiree Health Care, notes that a group of 61 major U.S. cities comprises a steep, $217 billion gap between what it has promised to public sector workers/retirees and money they actually have set aside to meet such entitlements. The findings are based off of investigating trends mainly from 2010 and 2009 and intimate the problem is likely to continue to grow.

It is a key reason why, despite Chapter 9 being used quite sparingly during the last 80+ years, Business Credit contributor Bruce Nathan, Esq., of Lowenstein Sandler PC, has been talking of the potential trend and its dangers for nearing two years. Deborah Thorne, Esq., of Barnes & Thornburg LLP, also expressed concerns. She predicted there could be significant ramifications for credit departments if a quick escalation in filings happened within the next couple of years.

“I don’t see states and municipalities becoming better funded then they have been,” Thorne said in the latest edition of the magazine. “I see that getting worse. Vendors selling to public entities want to be mindful of how they are going to be paid and how well financed the portion of the municipality is that you are dealing with.”

Pensions and other retiree entitlements for former public sector employees have been an issue in a number of places where Chapter 9 filings have been used as an answer to escalating debt problems that appear to be worsening for municipalities throughout the nation, rather than improving.

-Brian Shappell, CBA, NACM staff writer

• The U.S. Senate and House finally voted in favor of provisions to avert the long-discussed fiscal cliff that pitted Democrats/the Obama Administration and Republicans against each other on issues including taxes, budget spending and debt.
• The last Credit Mangers’ Index (CMI) of 2012 showed a small decline on a drop-off of sales levels. Fiscal cliff uncertainty throughout last month of the year was seen as a significant driver of problems.
• Proponents of Chapter 9 (municipal bankruptcy) got a boost in the form of a court decision against a pension group in California and a new law in Michigan easing filing requirementes somewhat.
• A deal was struck to push back contract talks for 30 days to avert a late-December port strike that would have affected more than a dozen of the largest East Coast ports at a time when retail could ill afford delays.
• India inked a Free Trade Agreement with its fourth largest trading partner, ASEAN (a block of Southeast Asian nations) and remains at work on several bilateral deals.
• Exporting levels in Asia improved slightly though the steep decline in the European Union amid the debt crisis looms as a massive concern for exporting nations and businesses there and virtually worldwide.
• Tribune Company finally exited bankruptcy.
• European Union manufacturing levels declined by levels greater than expected.
• Retail bankruptcies among British companies continued to rise for the calendar year 2012.
• Russia launched a registry of companies that declare bankruptcy.
• U.S. consumer and business confidence continued to slump at year's end.

(Note: For more on several of these stories, check out Thursday’s edition of NACM eNews, available late Thursday afternoon).

-Brian Shappell, CBA, NACM staff writer

In San Bernardino, CA, the City Council has voted on budget measure that would include stopping payments to its pension program at least temporarily. Officials will submit the proposal to a judge who tasked with reviewing its Chapter 9 bankruptcy filing, as well as its eligibility, before a deadline at the end of this week. Entitlements, such as worker pension funding, are the driving force behind the California community’s ongoing debt crisis. It is estimated the city has 143.3 million in unfunded pension obligations at present. Employee and retiree entitlements have become a financial scourge affecting many cities throughout the nation, and it's only expected to escalate as a result of a rapidly aging workforce.

Meanwhile, Harrisburg, PA, talk of a potential municipal bankruptcy could have legs again and may just force its creditors back to the negotiating table. Though the city has been denied Chapter 9 eligibility multiple times because of a quickly-passed state law aimed at temporarily blocking third-level cities in the state from filing for, the entire dynamic could change as said law is just days from expiring. As such, parties involved with an ill-fated trash incinerator project that has become the complete opposite of the financial windfall it was expected to be, could see a city with a bit more of power in the negotiating process without a massive obstacle in its way.

Talk of potential municipal bankruptcy has begun anew again in Detroit, as the city failed to meet certain required benchmarks set by the city to trigger some $10 million in state funding. City officials have acknowledge that it could run out of cash before year’s-end and struggle mightily to meet commitments without the funding. As such, city Mayor David Bing has noted that unpaid furlough days for public employees are likely to begin soon after the 2012 holiday season. The city has been regularly mentioned among municipalities struggling the most with insolvency for several years.

-Brian Shappell, CBA, NACM staff writer

Barring a massive and unlikely change, it’s only a matter of time now before the fourth California community this year files for municipal bankruptcy.

Atwater lawmakers/policymakers, as expected, met Wednesday – in both closed and open session -- to discuss the possibility of declaring a fiscal emergency, a move that would circumvent the 2011 California mandate that forces municipalities to the table with creditors for a period of no less than 90 days before a Chapter 9 legally can be filed. They voted to do just that amid a more than $4 million shortfall caused by the lengthy and sizable real estate downturn there as well as the growing cost of employee/retiree pensions and other entitlements.

Though a Chapter 9 bankruptcy has not been filed on the city’s behalf yet officially, declaring the fiscal emergency mirrors the play made by San Bernardino, one of three California communities to file for municipal bankruptcy in the last year, and is as thinly veiled an indicator as possible that such a move is imminent.

-Brian Shappell, CBA, NACM staff writer
 

As it looks more and more certain that one previously filed California community will not go through the entire Chapter 9 bankruptcy process, another seems to be spiraling toward it as quickly as any of its predecessors. And a 2011 state law designed to slow municipal bankruptcies may not be effective in this case, a strategy looking more like a trend in a state where so many debt-hobbled communities exist.

Atwater (CA) lawmakers/policymakers are expected to meet this week to consider taking steps to declare a fiscal emergency, a move that would circumvent the California mandate that forces municipalities to the table with creditors for a period of no less than 90 days before a Chapter 9 legally can be filed. It’s similar to the play made by San Bernardino, one of three California communities to file for municipal bankruptcy in the last year.  It appears the culprit in this case, like in many cities teetering on insolvency, is worker and retiree compensation and/or entitlements (pensions, health care, etc.).

On the flip side, the unwinding of Mammoth Lakes’ attempt to go through Chapter 9 appears to be continuing without a hitch. The possibility of the municipality avoiding going through the entire, painful process took off in recent weeks after it reached a tentative agreement on a settlement of the $43 million court judgment that was won in court by a land developer, a court ruling that almost single-handedly forced the community into insolvency. Said agreement occurred after Mammoth Lakes, essentially a resort/tourism town, officially filed for Chapter 9 protection.
It’s the second time in as many years that parties negotiated a settlement after a filing was made. Concessions with creditors in an out-of-court settlement between Central Falls, RI and its retired workers following that municipality's 2011 filing, one of the first and most publicized of the 2011/2012 wave of cases. The filing essentially forced the negotiations.

-Brian Shappell, CBA, NACM staff writer

A bit of compromise can apparently go a long way in Chapter 9 bankruptcy proceedings. After California’s mandated negotiations period designed to force creditors and municipalities to work things out previously yielded little in results, one city’s Chapter 9 proceedings just got quite a bit easier.

Mammoth Lakes, CA officials confirmed that it has reached a tentative agreement on a settlement of the $43 million court judgment that was won in court by a land developer, a court ruling that almost single-handedly forced the community into insolvency, unlike other U.S. cities that are dealing with problems like pension and health care costs.

“The settlement agreement, including any and all terms, will remain confidential until it is fully documented and executed,” said a release on the Mammoth Lakes, CA web site. “While steps are taken to document and seek approval of the settlement, all discovery and litigation among the parties will be put on hold… the town will provide additional information to the public as soon as the settlement documentation is finalized and filed for court approval, which is expected within weeks.”

The release did not outline the extent to which the municipal bankruptcy case will be affected. Mammoth Lakes filed for Chapter 9 protection just before the Independence Day holiday.

It’s the second time in as many years that parties negotiated a settlement after a Chapter 9 filing was made. Concessions with creditors in an out-of-court settlement between Central Falls, RI and its retired workers following that municipality's 2011 Chapter 9 filing, one of the first and most publicized of the 2011/2012 wave of cases. The filing essentially forced the negotiations.

-Brian Shappell, CBA, NACM staff writer

For the better part of a year NACM and contributors like Lowenstein Sandler PC’s Bruce Nathan, Esq., have been warning of the potential acceleration of municipal (Chapter 9) bankruptcy as an option for debt-hobbled communities and the potential downstream affects such filings could pose. Within the last week, two notable outfits chimed in on the topic – either directly or indirectly – of municipal defaults, both thinly veiling concern for municipal bondholders.

A new report from the Federal Reserve Bank of New York reveals its analysts found “municipal defaults are far more common than frequently cited statistics suggest.” While some analysts have attacked the assertions of the report as misleading, it has certainly laid the foundation to rile the municipal bond market, thought to be a virtual safe haven in the past.

The row comes on the heels of a Moody’s Investors Services release in which the ratings agency noted it would be reviewing, with additional depth, nearly 100  municipalities for potential downgrades in a state that already has seen three official filings this year. Moody’s also questioned whether a 2011 California law that mandates a 60-day medication between communities and creditors before a Chapter 9 filing can legally go through actually "normalizes" or “condones” partial and/or late-payments to bondholders.  

-Brian Shappell, CBA, NACM staff writer

(Note: More on this story in this week's eNews, available Thursday afternoon at www.nacm.org. NACM presents an Oct. 22 teleconference with Nathan on Chapter 9 bankruptcy. For more information or to register, visit www.nacm.org/calendar/details/435-teleconference-chapter-9.html).

Just three weeks after lawmakers in San Bernardino, CA voted to begin preparing a potential municipal bankruptcy filing, like two other state municipalities did before it, city officials have official requested Chapter 9 protection. It came several weeks ahead of expectations, largely on thinly veiled threats of lawsuits from creditors.

San Bernardino, like many U.S. cities struggling with debt,  is be tied to a lot of contracts with current and retired public workers, especially for pension and health care costs, that are zapping its budget. A previous news release noted “systemic” financial problems that would carry throughout 2012 and beyond and that “clearly, reductions to the expenditures side of the budget are not going to product the level of savings that will be needed to balance the budget.” The budget shortfall was estimated at $46 million.

California had implemented a state law requiring a 90-day mediation period designed to bring municipalities and their creditors to the negotiating table before struggling cities can file. While it has likely slowed the pace of filings, as intended, votes and discussions to pursue the eventually bankruptcy option have continued throughout the state.

-Brian Shappell, CBA, NACM staff writer

As predicted, the Stockton, CA Chapter 9 filing was not alone, as now two more communities have decided to take the path of municipal bankruptcy in the state.  

Lawmakers in San Bernadino, CA voted Tuesday to pursue a municipal bankruptcy filing, like Stockton did before it late last month. It also comes on the heels of Mammoth Lakes’ Chapter 9 filing in California just before the Independence Day holiday. San Bernadino, too, seems to be tied to a lot of contracts with current and retired public workers that are zapping its budget. California had implemented a state law requiring a 90-day mediation period designed to bring municipalities and their creditors to the negotiating table before struggling cities can file. While it has likely slowed the pace of filings, votes and discussions to pursue the bankruptcy option have continued.

“There will be a series of filings in the next six months to a year, there’s no doubt about it,” Lowenstein Sandler PC’s Bruce Nathan, Esq. told eNews in an interview last week. Nathan is among experts who have been predicting a surge in Chapter 9 filings since even before Harrisburg, PA; Jefferson County, AL; and Central Falls, RI grabbed headlines for attempts to file nearly a year ago.

San Bernadino had made mention of employee cuts in a fiscal plan released on its website, complete with amateurish corrections/changes marks throughout the PDF, and cited there were “no easy choices” on the horizon while foreshadowing impending decisions: “The financial situation in 2012 is a systemic problem held over for years…Clearly, reductions to the expenditures side of the budget are not going to product the level of savings that will be needed to balance the budget.”

- Brian Shappell, CBA, NACM staff writer

(Note: More on this story including Chapter 9 talk out of two Pennsylvania communities in this week's eNews, available Thursday afternoon).
 

There was no midnight hour deal to be had between the city of Stockton, California and its creditors, and it has earned the dubious distinction of becoming the largest city-based municipal bankruptcy filing in U.S. history.

Representatives for the city officially filed for Chapter 9 protection in federal court in the state capital, Sacramento, late Thursday. The deadline for negotiations between city lawmakers and creditors designed to avoid the largest city bankruptcy filing in U.S. history came and went earlier this week without a solution, as expected. Moreover, on a 6-1 vote similar to one the Stockton (CA) City Council gave to approve a measure three weeks ago to authorize its city manager prepare its Chapter 9 petition, the council passed its Pendency Plan, essentially a budget to provide for daily operations while the city is in bankruptcy. The biggest cuts will be to retired pensioners, namely their medical benefits.

“This is the most difficult and heart-wrenching decision that we have ever been faced with; we must take action to protect the health, safety and welfare of the entire city and begin the recovery process,” said Mayor Ann Johnston.

The city, which boasts a large number of retiree entitlements and the second-highest foreclosure rate among U.S. cities, and its creditors, not coincidentally including a public retirees union and Wells Fargo, had gone through extensive negotiations. The 2011 California law’s requiring such mediation before an official filing aimed at keeping struggling municipalities from hastily entering into a Chapter 9. There was hope the law’s mandated negotiations were close to yielding a positive result in Stockton, which could become a bellwether case, but talks fell apart.

Stockton is among many U.S. cities, including several in California, struggling to get out of crushing debt wrought by expensive union contacts and retiree entitlements as well as tax base shrinkage caused by the real estate collapse. NACM contributors like Bruce Nathan, Esq., of Lowenstein Sandler PC, have been saying for the better part of a year that a wave of Chapter 9 filings would not be a shock and that creditors owed substantial debts by struggling municipalities needed to start preparing for worst case scenarios: more Chapter 9 filings.

- Brian Shappell, CBA, NACM staff writer

(Update 2: Since this story's original posting, the Stockton City Council voted 6-1 to authorize its city manager to file a petition seeking protection under Chapter 9 of the U.S. Bankruptcy Code).

Just days after an agreement to extended a state-mandated mediation period provided hope that Stockton, CA could avoid a municipal bankruptcy filing, it appears the option of Chapter 9 could be looming…and as early as next week. It’s a bad sign considering the number of debt-hobbled communities and, now, school districts in the state and throughout the country.

Stockton’s City Council has scheduled a June 5 vote to decide whether the community, through its attorneys/representatives, will file for Chapter 9 protection. Just one week ago, its continued negotiations with creditors under the framework of a 2011 California law mandating mediation periods made it seem like the process was working and a potential template for other communities and states. But as the trite adage goes, what a difference a week makes.

The 2011 California law and its mandated mediation aimed to keep struggling municipalities from hastily entering into a Chapter 9. Mayor Ann Johnston said the extended negotiations meant “creditors understand our fiscal circumstances, and they believe that it is worth the investment of time and resources to work toward a solution.” The impending June 5 vote shakes confidence that enough middle ground can be found between the creditors and the community. If eventually filed, Stockton would unseat Jefferson County, AL as the largest municipal bankruptcy filing in U.S. history.

Meanwhile, a new report out of the state last week noted that at least a dozen of California’s public schools serving more than 2.5 million children do not have enough money to operate properly over the next year. Short of tax hikes, strained budgets and continually shrinking tax bases stung by the recession and the real estate crash could lead a line of schools to eye the same option Stockton community leaders clearly appear to be leaning toward in an attempt to gain breathing room from their creditors.

-Brian Shappell, CBA, NACM staff writer
 

A California community that once seemed destined to head into municipal bankruptcy will continue working with its creditors in a process designed to force stakeholders to the negotiating table. If the process proves helpful, it could give other states with communities facing insolvency some ideas on how to slow a potential rash of filings.

Stockton officials agreed with all significant parties involved to extend a mediation process designed to delay, if not keep them out of a municipal bankruptcy filing. The extension of mediation refers to the mandatory 60-day process outlined by a 2011 California law that aimed to keep struggling municipalities from hastily entering into a Chapter 9. Mayor Ann Johnston believes the development marks “a good sign.”

“It means that our creditors understand our fiscal circumstances, and it indicates that they believe that it is worth the investment of time and resources to work toward a solution,” the mayor said. “We are doing everything in our power to avoid bankruptcy. Mediation is our last and best chance.”

Stockton officials have become the first city in California to begin going through the newly mandated mediation process. Former U.S. Bankruptcy Court Judge Ralph Mabey began in the role of mediator in Stockton’s debt negotiations in March. If eventually filed, Stockton would unseat Jefferson County, AL as the largest municipal bankruptcy filing in U.S. history.

-Brian Shappell, CBA, NACM staff writer

Labor contracts, especially those related to pensions and other entitlements, appear to be a common factor for a couple of U.S. cities that appear on the brink of municipal bankruptcy.

In Providence, RI this week, former state Supreme Court justice and the state-appointed receiver for the Rhode Island’s Central Falls bankruptcy from last summer, deemed a Chapter 9 for the city essentially unavoidable.  To wit, its mayor, Angel Taveres, noted the city could go broke by June without concessions on said contracts/entitlement agreements. Such an argument forced an out-of-court settlement between Central Falls, RI and its retired workers following that municipality's 2011 Chapter 9 filing.

There now is more evidence than ever that Stockton, CA is heading toward municipal bankruptcy, as well. Former U.S. Bankruptcy Court Judge Ralph Mabey has been tasked with the role of mediator in Stockton’s debt negotiations -- mediation now is required per a 2011 California law forcing parties to the table for up to 90 days prior to a Chapter 9 filing being allowed. Stockton officials have become the first to begin going through the new mandate’s mediation process. If filed, Stockton would unseat Jefferson County, AL -- a case recently allowed to continue after being deemed valid by a bankruptcy judge -- as the largest municipal bankruptcy filing in U.S. history.

Brian Shappell, CBA, NACM staff writer

Though Providence has been front of mind as the city perhaps most likely to file for Chapter 9 municipal bankruptcy protection, it appears Stockton, CA might threaten to beat the Rhode Island city to the punch. Though California voted in a new law last year to slow municipal bankruptcy filings amid growing reports of widespread financial problems within many local governments, Stockton officials have become the first to begin going through the new mandate’s mediation process. Reportedly, officials there and representatives are trying to set up meetings/negotiations with bondholders, creditors and employee unions to discuss options to help the debt-addled community.

Meanwhile, in Jefferson County, AL, creditors tied to its what is to date the largest Chapter 9 filing ever in the United States, a suffered a setback in derailing the proceedings. U.S. Bankruptcy Court Judge Thomas Bennett released a ruling allowing the county to continue operating under bankruptcy protection and the case to proceed despite objections from creditors over what state law actually allows. Jefferson County has been reeling financially from a botched sewer retrofit venture that has left the county with upwards of $4 billion in debt.

Brian Shappell, NACM staff writer
 

Providence has become the latest city to get press for flirting with the brink of insolvency and, thus, is starting to generate increasing debate over whether it will file for Chapter 9, municipal bankruptcy, protection. To wit, it's mayor, Angel Taveres, noted the city could essential go broke by June without concessions from retired employees as well as, to a lesser extent some nonprofit entities.

The statement could be a strategy to bust some collective bargaining agreements after the smaller Central Falls, RI municipal bankrutpcy that caused retirees to eventually agree to an out-of-court settlement to save millions on entitlements.

Meanwhile, the bombshell of the week in bankruptcy came out of Harrisburg. State-appointed receiver David Unkovic said publicly that despite the state and the mayor’s vitriolic fight to prevent the council’s Chapter 9 filing last fall, bankruptcy may in the end be the only choice for the city by July if stakeholders don’t make concessions and warring city government factions don’t agree to work together.

Unkovic recently unveiled a plan to keep the city out of bankruptcy that included selling the incinerator operation that has caused a lion's share of its debt as well as seets such as parking structures.

(Note: More on Chapter 9/municipal bankruptcy in the lead story of this week's NACM eNews, available later today at www.nacm.org).

Brian Shappell, NACM staff writer

In what could catch the attention of municipalities struggling with entitlement costs throughout the nation, a judge has approved a deal between public employees and a small Rhode Island city that was largely encouraged by a Chapter 9 filing in mid-2011.

U.S. Bankruptcy Judge Frank Bailey has approved a deal forged by Central Falls and many of its retired employees to voluntarily reduce the level of benefits they are receiving. The judge also approved a new collective bargaining agreement where current police and fire employees there are taking a haircut on future benefits.

Retiree benefits/pensions obligations were the overwhelming cause for Central Falls to file in 2011 as communities throughout the country fret about escalating costs for retiree health care and pensions.  Though unable to negotiate concessions beforehand, the Chapter 9 inspired public workers and retirees to take significant voluntary cuts because it, in theory, means they will keep more than if the benefits were slashed to the proverbial bone during the bankruptcy reorganization. It is estimated the newly forged deal will help the city save more than $1 million this year, which has been characterized as critical for Central Falls to resume any semblance of operational normalcy.

With more cities struggling with a host of financial challenges, most significantly entitlements, the issue could likely become increasingly common in the 26 states that allow municipal bankruptcy through Chapter 9 filings. While few believe Chapter 9 will become an epidemic, it certainly bears watching given the state of budgets out there.

“There are big problems for a lot of these municipalities, especially the collective bargaining agreements that have built in generous retirement obligations,” said Bruce Nathan, Esq., of Lowenstein Sadler PC. “I think you will see this continue and increase well beyond this year. If state laws can be complied with, why wouldn’t [struggling municipalities] do it if this is an option for them to deal with their financial problems?”

(Note: More on this topic and the court cases of greatest important to credit professionals will be featured in the upcoming, February edition of Business Credit Magazine. Look for it in about two weeks).

Brian Shappell, NACM staff writer