Municipal Bankruptcy

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

The Supreme Court announced that, in light of a ruling that conflicts with two previous ones from other bankruptcy courts, it will consider the following situation: “whether a debtor may pursue a chapter 11 plan that proposes to sell assets free of liens without allowing the secured creditor to credit bid, but instead providing it with the indubitable equivalent of its claim under Section 1129(b)(2),” likely this Spring. In essence, it will decide whether or not creditors can use what is owed to them instead of cash in the bidding process for assets. A final ruling on credit bidding would likely follow by about three months.

The Supreme Court noted that a Seventh Circuit Court of Appeals in Chicago case (RadLAX Gateway Hotel LLC v. Amalgamated Bank, 11-166) allowed a secured creditor to bid its claim in lieu of a cash bid. That directly conflicts with a pair of other cases including a Third Circuit decision in Delaware was in the bankruptcy case of Philadelphia Newspapers LLC.

Meanwhile, on the municipal bankrupcty front, the Harrisburg, PA Chapter 9 saga started increasingly resemble "Keystone Cops" as the city council's attorney missed a deadline to appeal a judge's dismissal of its bankruptcy filing.  U.S. Bankruptcy Judge Mary France rejected an appeal by the city council’s attorney, over her previous decision to disallow a municipal/Chapter 9 bankruptcy filing coming from the state’s capital city.  France rejected the infamous Chapter 9 filing, done largely because of runaway debt tied to a trash incinerator project, last month on grounds that the city council was not legally authorized to file it.

And, in Jefferson County, creditors tied to its Chapter 9 filing from the Fall have asked to have the case dismissed, similarly to Harrisburg, on the argument that its county commissioners were not authorized to do so. U.S. Bankruptcy Judge Thomas Bennett is charged with considering the motion to dismiss on what amounts to technicalities in the filing’s legitimacy. 

(Editor's Note: more on these and more bankruptcy stories in this week's eNews, being released late Thursday afternoon).

Brian Shappell, NACM staff writer

With the lengthy holiday being celebrated in the United States, a few stories may have slipped past usually eagle-eyed credit professionals. Here are some happenings of note:

The “Big Three” credit ratings agencies (Standard 7 Poor’s, Fitch Ratings, Moody’s Investment Services) experienced a significant legal setback last week in the U.S. Supreme Court. It was ruled that the ratings agencies were not protected from lawsuits based on invoking rights under the First Amendment. The three had tried to use such a defense to protect itself from suits brought by investors who were burned after using the companies’ ratings information, which turned out to be far from accurate, about a half-decade ago. Still, two of the three agencies (Moody’s, Fitch) were cleared in said suit because of a lack of evidence.

In the Harrisburg Chapter 9 bankruptcy case, Judge U.S. Bankruptcy Judge Mary France found the Pennsylvania state law (Act 46) to be constitutional, ending the council's hopes of continuing the bankruptcy proceedings and avoiding state conservatorship. Act 46 forbids “third-class” (by population totals) Pennsylvania cities from declaring municipal bankruptcy prior to July 2012.  (Story at http://blog.nacm.org). A judge also intimated that a lack of cooperation/aggrement on the filing between the council and the embattled mayor made the filing inappropriate.

In Jefferson County, AL, where the largest U.S. bankruptcy filing the nation’s history is proceeding, Judge Thomas Bennett said he will not remove an appointed receiver charged with working on the county’s massive debt tied to a sewer renovation project. However, the judge intimate he could limit the receiver’s powers somewhat to give the county a little more influence over the Chapter 9 proceedings.

In the area of free trade agreements, South Korean lawmakers ignored a significant portion of the voter base fighting its pact with the United States over in fear of job losses or economic hits, and its ruling party called a hasty, surprise Wednesday vote. As a result, the FTA, one started during the Bush Administration and signed by President Barack Obama about one month ago, passed overwhelmingly but not before some unrest, including one opposing politician allegedly letting off some form of tear gas or pepper spray in parliament’s chambers. The deal’s value is estimated at nearly $90 billion. (Story at http://blog.nacm.org).

Struggling newspaper publisher Tribune Co., which has become a symbol of struggles in the newspaper/old media industry as well as a bit of a laughing stock based off of what looked like reckless and “old-boys’ club” internal policies, saw yet another reorganization plan filed in its bankruptcy. There’s no telling at this point if its prospects are any better than several other failed efforts of the past in the languishing proceedings.

Brian Shappell, NACM staff writer

Update: A district court judge in Pennsylvania opted to disallow a municipal/Chapter 9 bankruptcy filing coming from the state’s capital city on grounds that the city council that filed it was not authorized to do so.

Judge U.S. Bankruptcy Judge Judy France said early in the proceedings Wednesday that her decision on the eligibility of Harrisburg’s Chapter 9 filing would hinge largely on a legality issue based on state law. She noted that if a newly enacted Pennsylvania law that bars bankruptcy filings for third-level category cities from filing a Chapter 9 bankruptcy before July 2012 could be considered unconstitutional then the council and, thus, the city could proceed with its bankruptcy filing. She noted that if the state law was deemed within constitutional bounds, the bankruptcy filing would be denied, which would pave the way for the state to take over Harrisburg’s finances in short order. France eventually found the state law (Act 46) to be constitutional, ending the council's hopes of continuing the bankruptcy proceedings and avoiding state conservatorship. 

Earlier this fall, Harrisburg’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so said it gives the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit out of proportion to that of investors. At present, debt from the bungled incinerator project quintuples the city’s annual budget. 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.

The state, mayor and incinerator creditors are among a long line of opponents who have asked the judge to throw away the bankruptcy filing as improper. Should the council “win” the right to continue the bankruptcy on the basis of constitutionality, several more lawsuits almost certainly will subsequently challenge the filing in the coming weeks and months.

The case could be a watershed moment in Chapter 9 law as many believe it could increase the cost of credit for cities of similar sizes and debt and could set a virtual roadmap or set of precedents for municipalities trying to get out of paying creditors over failed gambles of the past. Stay tuned…

Brian Shappell, NACM staff writer

Many weeks ago, it seemed Jefferson County, AL officials and its main creditors on a sewer renovation project that has sucked its coffers dry had the framework for deal that would keep the community out of filing for Chapter 9 bankruptcy. But then, the prospects for such a deal were gone and the largest municipal bankruptcy in the history on the union now has gone on the books.

Jefferson County Commissioners voted 4-1 Tuesday evening to declare bankruptcy. Alabama Gov. Robert Bentley confirmed publicly that a deal with creditors that could have renegotiated upwards of $1 billion of the $3 billion in debt tied to a sewer renovation had fallen through before the decision. The Chapter 9 filing, which lists the county’s debts in excess of $4 billion, is nearly double that of the well-documented filing in Orange County, CA nearly two decades ago.

Creditors seemed to throw at least a temporary lifeline to Jefferson County in the form of a renegotiation plan this summer. However, county officials and the creditors were reportedly hundreds-of-millions of dollars apart on terms, and officials made it known they would not agree to waiving Chapter 9 filing rights under any agreement. Even Bentley noted earlier this summer on multiple occasions that Chapter 9 was "a very strong possibility," though his statement on the matter on Tuesday could best be described as sheepish or humbled.

The filing, perhaps a harbinger of things to come amid cities struggling with bad investments, shrinking tax revenues and, notably, pension/health care entitlements; the Jefferson County filing follows those of Harrisburg, PA and Central Falls, RI from recent months. At least a half-dozen municipalities have filed for Chapter 9 bankruptcy protection in 2011.

Brian Shappell, NACM staff writer

Though a hearing on the Thompson and Pennsylvania government's opposition to Harrisburg's Chapter 9 bankruptcy filing is tentatively scheduled for Nov. 23, the governor may have thrown a wrench into the entire matter already by signing a new law that paves the way for the state to declare a fiscal emergency and take over the financial decisions of the city.

Governor Tom Corbett signed Senate Bill 1151 that decries whenever a third-class Pennsylvania city (a category into which Harrisburg fits) fails to implement a fiscal recovery plan when facing insolvency, the governor will be given power to declare fiscal emergency once a city becomes insolvent or is projected to within 180 days. Also, the city in question, in this case Harrisburg, will have 30 days to develop and adopt an acceptable fiscal recovery plan to avert a state takeover of financial decision-making. Without one, which is unlikely in Harrisburg, the takeover would begin immediately after the designated 30-day period.  This all could very well affect the recent bankruptcy filing, though the extent remains somewhat unknown.

“I remain a strong proponent for municipal governments tackling their own problems and coming together to develop a fiscal recovery plan when necessary,” said Corbett. “But when that fails to happen, the state has to take action to ensure public safety…the state will intervene.”

As noted on NACM's blog and eNews this week, Harrisburg’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so believe it gives the city leverage to renegotiate debt largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit out of proportion to that of investors.

Brian Shappell, NACM staff writer

Harrisburg Mayor Linda Thompson, with backing from the state of Pennsylvania, is striking back at her own city council for their move to enter the capital city into municipal bankruptcy.
Last week, the NACM blog reported Harrisburg’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Supporters of doing so believe it gives the city leverage to renegotiate debt, largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit not proportional to that of investors.

However, Thompson and the state have now filed a motion in U.S. District Court to have the bankruptcy filing voided, arguing the city council, by statute, does not have the authority to authorize a bankruptcy filing without the documented support of the city mayor, and that it acted improperly in the filing. Thompson, following a failed bid by the state to stymie the bankruptcy, offered up a financial plan to avoid such a filing that included raised taxes and the selling of some city assets, namely parking structures and the aforementioned incinerator operation. Like the state’s plan, the city council rejected Thompson’s plan by a narrow margin.

A hearing on the Thompson/state motion is tentatively schedule for Nov. 23.

Brian Shappell, NACM staff writer

Just one day after California passed a law designed to slow the pace of cities declaring bankruptcy there (see Tuesday's blog posting), another state’s previous effort to prevent a Chapter 9 filing by its capital city failed on a narrow city council vote Tuesday.

In what has been building for months, Harrisburg, PA’s city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Reports indicated a bankruptcy petition was faxed to U.S. District Court soon after. Supporters of doing so believe it gives the city leverage to renegotiate debt, largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers that didn’t want to take a hit not proportional to that of investors.

Bruce Nathan, Esq., of Lowenstein Sandler PC, who is presenting an NACM teleconference on the topic today at 3 pm (EST) noted the municipal bankruptcy issue has potential to grow significantly in the coming months on struggles to pay for things such as skyrocketing health care and pension obligations as well as lower revenue and construction-related debts tied to the ongoing economic downturn.

For more information on today's teleconference, including how it will affect credit managers, or to register, click here.

Brian Shappell, NACM staff writer

In what has potential to emerge as a late 2011/early 2012 buzz topic, another state has moved to toughen the process for debt-saddled municipalities to declare for bankruptcy protection.

California Gov. Edmund “Jerry” Brown this week signed Assembly Bill 506, which will require municipalities seeking the ability to file Chapter 9 to either declare a fiscal emergency or document efforts to negotiate with creditors prior to such a filing. Though promoting it as otherwise, the move appears to be a thinly veiled effort to pump the brakes on the slowly emerging trend of municipalities considering Chapter 9 as an increasingly viable option to beat financial woes. Pennsylvania promoted somewhat similar legislation over the summer.
Brown said the legislation “puts in place reasonable steps for local governments to take before filing bankruptcy…let’s be clear, this bill does not prevent a municipality from declaring bankruptcy or even throw roadblocks in its path.” He continued the goal was to find “alternative, less drastic solutions” then filing.

The municipal bankruptcy issue has become an increasingly hot one for businesses/creditors that do significant selling on terms to municipalities, especially ones now struggling, amid the ongoing financial crisis and increasing entitlement issues. This year, about a half-dozen municipalities filed for protection under Chapter 9 with the latest of which emanating out of Central Falls, RI. Jefferson County, AL narrowly avoided it thanks to a $1 billion renegotiation approved by debt-holders tied to a sewer rehab project, and Harrisburg, PA continues to weigh what appear to be a very narrow set of options as creditors for a failed trash-incineration project haven’t been so flexible.

Bruce Nathan, Esq., of Lowenstein Sandler PC, who is presenting an NACM teleconference Wednesday on the municipal bankruptcy issue, listed skyrocketing health care and pension obligations as well as lower revenue and construction-related debts both tied to the ongoing economic downturn among top reasons for the growing trend. He noted that specifically in California, the state capital city of Sacramento alone has unfunded retiree health care liabilities of $245.6 million and that the bankruptcy filing in the city of Vallejo is among the largest in U.S. history.

For more information on or to register for Wednesday’s teleconference on this topic and how it will affect credit managers, click here.

Brian Shappell, NACM staff writer

For the second time in as many months, Harrisburg’s city council narrowly voted against adopting a debt plan designed to keep the struggling municipality out of Chapter 9 bankruptcy. And the move could very well leave the city unable to meet debt obligations coming up mid-month, including payroll.

Opponents of the latest plan championed by Harrisburg Mayor Linda Thompson as an alternative to filing for municipal bankruptcy protection, continued to criticize plans they believe put investors on better footing than rank-and-file residents when dealing with the Pennsylvania capital’s debt. Harrisburg officials continue to pursue the long-shot options of landing significant short-term loans to push the problem off, at least temporarily.

Thompson had offered up a debt plan slightly different than different from the one proposed by the state, both with the aim of preventing a massive default. But council members were resistant to ideas such as a significant property tax hike and the selling of city-owned parking garages and proverbial money pit in the form of a trash incinerator, which was included in both plans. The failed trash incinerator project, sold to voters as a potential cash-generator, stands as the primary cause of Harrisburg's massive debt problems.

Pennsylvania state lawmakers hurried earlier this summer to pass S.B. 907, which would strip any third-level city—Harrisburg fits that distinction—of state funding if it files for bankruptcy before July 2012. Some city lawmakers remained unfazed in the belief that bankruptcy remains a viable option that should be explored, despite the ramifications. State officials appear concerned that a Chapter 9 filing by Harrisburg would sully the reputation of the state capital and increase the cost of borrowing for the city in the future, as well as many other similar-sized Pennsylvania cities.

Brian Shappell, NACM staff writer

On the heels on the fifth municipal bankruptcy filing this year in a small, yet press-hounded community in Rhode Island, lawmakers in an Alabama community have delayed a vote on a potential Chapter 9 filing there for the second consecutive week.

In Jefferson County, AL, it appears to be more a case of trying to work out a deal to stay out of bankruptcy rather than simply delaying the inevitable as county lawmakers moved a planned vote Thursday back eight days (to Aug. 12). A major creditor and Jefferson County are negotiating but remain far apart on terms thus far during negotiations – it’s been reported that the creditor is willing to shave as much as $1 billion off the county’s debt, but lawmakers want a larger break of $1.3 billion. Jefferson County’s main debt problems are related to the more than $3 billion in debts tied to a sewer rehab project there several years ago.

Alabama Gov. Robert Bentley noted earlier this summer that Chapter 9 was "a very strong possibility." It would be the largest municipal bankruptcy filing in U.S. history.

The delay in the vote regarding a Chapter 9 filing, which had been seen as an inevitability before creditors began negotiations, comes during the same week that Central Falls, RI opted to file. Facing pension obligations of about $80 million, an estimated $25 million deficit projection through 2016 and former employees or widows unwilling to voluntarily reduce their entitlements, it was seen as the only option to avoid financial doom for the cash-strapped community near Providence.

Brian Shappell, NACM staff writer

The city council of debt-hobbled Harrisburg, PA voted down a debt-restructuring plan suggested by the state and reportedly continues talks with bankruptcy efforts despite the state’s move to make filing a Chapter 9 much more difficult, not to mention painful.

After months of rumors regarding a possible Chapter 9 bankruptcy filing necessitated largely by massive debts from a trash incinerator project in Pennsylvania’s capital city, Harrisburg lawmakers voted on a debt-recovery plan on Tuesday. By opponents won out, saying tax payers had to carry an unfair share of the pain compared with investors/bondholders. Pennsylvania political experts have noted that bankruptcy is an option that still remains on the table, even as the state passed a new law seeking to stymie such a move.

State lawmakers hurried in recent weeks to pass legislation, S.B. 907, that would strip any third-level city – Harrisburg fits into that distinction – of state funding if it files for bankruptcy before July 2012. Though more than 50 Pennsylvania cities would be affected by this, it was a thinly-veiled attempt to prevent Harrisburg, specifically from filing amid its massive problem with getting debts under control. Among the concerns would be the sullying of the capital city’s reputation and, by default, that of the state. That’s not to mention the subsequent concern likely on the part of investors and bondholders, thus making it more expensive for other third-class Pennsylvania cities to borrow even if they’re much better off than Harrisburg fiscally, which most are.
 
The legislation is the latest, and strongest, political action taken by state governments hoping to prevent municipalities from more frequently going the bankruptcy route when its financial situation grow difficult to control. Other states where actions, albeit slightly less direct, have been taken in the wake of damage caused by the ongoing low economic recovery include California, Rhode Island and Michigan. The question remain is whether or not more states will take bold moves to nip the municipal bankruptcy issue in the bud, so to speak. Stay tuned…

(Editor’s Note: Is Chapter 9/municipal bankruptcy a topic on which you’d like to hear more about, primarily in the form of a teleconference hosted by one of NACM’s top legal experts? Please let us know what you think by e-mailing traceyf@nacm.org. Please put “Chapter 9 teleconference” in the subject line of your response e-mail.)

Brian Shappell, NACM staff writer