Jefferson County

U.S. Bankruptcy Judge Thomas Bennett this week said bankrupt Jefferson County, Alabama, does not have to immediately face a lawsuit over its decision to close the emergency room of its money-losing hospital for the poor. Judge Bennett held that the city of Birmingham cannot proceed with a lawsuit seeking to keep the emergency room open after Dec. 1, the day the county plans to end in-patient care at Cooper Green Mercy Hospital. Last August, the judge had said he was inclined to halt the case. At that Aug. 30th hearing, he told lawyers for the city that, “What I’m looking at is really an action to try to control the operations’’ of the county, which isn’t allowed under Chapter 9 of the U.S. Bankruptcy Code. In a hearing this week, Judge Bennett confirmed his decision.  The battle over the hospital is the first time the county’s health-care responsibilities have been part of its bankruptcy case. The county has focused on cutting bond debt tied to the county’s sewer system and replacing a wage tax that brought in more than $60 million a year before it was voided by a state court.

JeffCo

Jefferson County, which is under Chapter 9 federal bankruptcy, intends to appeal U.S. Bankruptcy Judge Thomas Bennett’s refusal to let the county reduce payments to bondholders. Judge Bennett had ruled in June that the county cannot cut the payments so it can spend more on its aging sewage system or pay legal fees. Lawyers for the county said in a filing this week they will appeal the ruling. Bondholders are owed more than $3 billion, debt that is backed by the payments made by business and residents in Alabama’s biggest county. The county filed the biggest municipal bankruptcy in the U.S. after elected officials and creditors failed to implement a proposal to cut the sewer debt by about $1 billion.

Harried in Harrisburg

According to a state official, the state’s capitol city, Harrisburg, has enough cash to last through November. The official noted that delaying payments to some vendors could help Harrisburg make it through the end of the year. The official, Fred Reddig of the Department of Community and Economic Development, which oversees the state’s distressed communities, also said the city may issue some tax anticipation notes (TANs) in January if banks are willing. Mr. Reddig said Harrisburg, which remains under state Senate is scheduled to begin hearings on the incinerator bond financings tomorrow.

Wolverine Test

Michigan Treasurer Andy Dillon has indicated he will be disappointed if voters overturn the state’s emergency management law — the strongest in the nation. Nevertheless, he said if Wolverine voters reject the law next month, it would not spark a string of municipal bankruptcies or turn the Michigan local government landscape into one resembling California’s (see above). To date, the law has been used to solve the most pressing problems facing the state’s most stressed jurisdictions. Should the law be overturned, Mr. Dillon stated the state’s previous emergency management law, combined with a few new models, should be sufficient. Mr. Dillon (not to be confused with Marshall Dillon) spoke after he, Gov. Rick Snyder, and state budget director John Nixon met with all three major rating agencies in New York City in an ongoing effort to regain Michigan’s triple-A rating. This year’s meeting comes ahead of a roughly $100 million general obligation bond deal set tentatively for Nov. 8, two days after voters will weigh in on whether to repeal the EM law, known as Public Act 4, as well as five other major ballot initiatives with the potential to have a big impact on the state’s future. One measure would make collective-bargaining rights part of the constitution, and another would require a two-thirds legislative supermajority for any tax increases. There are currently seven Michigan jurisdictions under emergency management, with an EM expected to be named soon in an eighth, Allen Park. Mr. Dillon said the state is preparing to exit three stressed cities: Ecorse, Pontiac, and Benton Harbor. The emergency managers in those cities tapped PA 4 to implement a swath of changes that address core costs, like labor contracts. In Allen Park, he said an emergency manager lacking the powers of PA 4 would likely have a difficult time because one of the biggest problems is a police and firefighter contract that is “virtually impossible for the city.” In Detroit, Mayor Dave Bing relied on powers in PA 4 to order more than $100 million of wage and benefit cuts to current contracts over the summer. Detroit operates under a consent agreement with the state instead of an EM. The agreement has some ties to PA 4 but would not be overturned if the law is overturned. Top state officials would likely push for a new law that features the use of consent agreements and financial advisory boards for fiscally stressed communities if PA 4 falls, according to Dillon.

Early Warning System

California Treasurer Bill Lockyer reports the state is working on the development of an early warning system to prevent more municipal bankruptcies through early detection of signs of financial trouble. He compared the goal to stress testing, “where we try to determine what are the right metrics to cause red flags, alarm, some form of friendly discussions with experts, external advisers about what might be done to avoid a potential crisis.’’ Stockton, San Bernardino, and Mammoth Lakes have sought Chapter 9 protection, stoking investor concerns that more will follow as finances worsen and bankruptcy’s stigma fades. Mr. Lockyer said he does not expect the trend to continue: “I agree with those who have said probably not, there may be some, not very many.” The early-detection system is a collaboration among the treasurer’s office, the controller, the Legislature, and officials in Los Angeles and San Diego, according to Mr. Lockyer. Lawmakers would have to approve the plan. Analysts at the conference said they are taking a closer look at the willingness of California cities to repay their debt in light of the bankruptcies. “It is difficult to assess a city just based on the numbers,’’ said Melanie Tung, senior municipal research analyst at Wells Capital Management. “Management, the willingness and ability to pay – those are measurements that we have looked at and are trying to examine more closely as we look at credits now in this environment.” Treasurer Lockyer stated he did not believe California municipalities are becoming less willing to repay their debt: “Just the opposite.’’ As per the above, however, Moody’s and S&P appear to differ in their predictions of further municipal bankruptcies in California. Gabriel Petek, an S&P analyst , said he does not anticipate a “tsunami’’ of filings, noting the communities in bankruptcy are a fraction of the 482 cities in the state: Of the 201 communities that S&P rates, he noted: “we believe that those that are at most risk of encountering this level of financial distress are already at the very low end of the rating spectrum.” Moody’s, as per the above, seems more pessimistic.

California Undreamin'

Moody’s Investors Service hit 54 California local credits with either downgrades or by placing them on review for downgrade, citing the economic strains in the state. The rating agency Monday put the general obligation bond or issuer rating of nine cities on review for possible downgrade, placed the lease-backed obligations of 27 cities on review for possible downgrade, and downgraded nine pension obligation bond issues or similar financings, stating: “The actions reflect a combination of fundamental economic pressures in the state, the different way in which various revenue sources have been affected, and the factors that influence a city’s ability and willingness to pay the obligations backed by these revenue sources.”

On October 9, 2012, we announced a number of rating actions and reviews affecting the debt obligations of 32 cities and one pooled financing in California. Most of these actions are negative – downgrades and reviews for downgrade – and the majority affect securities that are solely paid from these cities’ general funds and do not benefit from a specific, pledged revenue source. The actions reflect a combination of fundamental economic pressures in the state, the different way in which various revenue sources have been affected, and the factors that influence a city’s ability and willingness to pay the obligations backed by these revenue sources.

This week’s rating actions come after Moody’s said in August that it would review the credits of 95 California cities. Moody’s said some cities are suffering due to the dramatic impact of the housing market bust on parts of the state and the rigid constraints on how municipalities can raise revenue. Some of the larger cities affected include Fresno, which saw two of its bonds downgraded to Baa2 and 12 of its credits put on review for downgrade. In addition, Sacramento had its issuer rating put on review for downgrade along with five of its other securities. Oakland had five of its credit obligations tagged for downgrade review. But, the agency placed San Francisco and Los Angeles on review for a possible upgrade to “reflect strengths that may not be adequately reflected in their current ratings, including their relative resiliency during the economic and property market downturns.” Some of the most troubled California bonds, according to Moody’s, include debt issued by Inglewood, Petaluma, Santa Ana and Azusa. Lease-backed obligations, unlike GO bonds, are not backed by voter-approved property taxes and are paid out of a city’s general fund.

The agency noted two critical points: 1) Pension obligation bonds are also paid out of a city’s operating budget and thus must compete with essential services, such as libraries and public safety contracts, and 2) The most significant of these constraints fiscal constraints on California cities is the state’s constitutional ban on raising ad-valorem property tax rates to pay for operations, while cities must also seek voter approval to increase any tax, fee or charge to pay for general operations.: “These constraints, combined with some California cities’ relatively steeply rising costs, will likely result in their recovering more slowly than their peers nationally, even if the state’s economic recovery tracks the nation’s.” Moreover, Moody’s noted, that “cost-cutting fatigue” may be weakening the willingness of the state’s cities to use their general funds to pay for pension obligation bonds and make lease payments.

Moody’s also noted in the report that the recent bankruptcy filings in Stockton and San Bernardino may signal some reluctance to pay for debt obligations in the municipal market since they reflect generally tight budgets, as opposed to such failing enterprises as convention centers, arenas or other specific projects that have caused previous municipal bankruptcies or defaults: “Though we do not expect many cities to follow Stockton and San Bernardino into bankruptcy, as long as the economic recovery remains sluggish, the risk has increased that some California cities will make this choice.” 

San Bernardino

The SEC has launched an “informal inquiry” of San Bernardino, Ca.’s finances and ordered the city to preserve bond documents and communications with underwriters. The nature of the agency’s inquiry to the city in Chapter 9 is not detailed in its October 11^th epistle, but directs city officials to preserve all records of securities offerings and written communications with underwriters, fiscal advisers, and credit ratings companies. The action follows the agency’s announcement last July that it may sue Miami over whether it provided adequate financial data to investors when it borrowed through the muni market. In San Bernardino, the county Sheriff’s Department said a probe of possible criminal activity in City Hall had begun several months before the city sought Chapter 9 court protection on Aug. 1. Earlier investigations led to agreements with New Jersey, which settled SEC claims in 2010 that the state misled investors by masking the underfunding of its biggest pension plans, and an accord with San Diego over similar issues. San Bernardino, the third California city to enter bankruptcy this year, relied on a variety of budgetary maneuvers to stay solvent, such as redirecting money from restricted accounts, according to its interim city manager. Mayor Patrick Morris this week stated that the SEC inquiry is “fine.” Mayor Morris, a former judge in criminal and family law courts, said he is aware of no criminal conduct in city finances: “As a trial jurist, I never want to predict…I know of nothing.” San Bernardino failed to make a $1 million interest payment due Oct. 1 on 2005 taxable pension bonds, according to an MSRB filing yesterday by trustee Wells Fargo Bank. The city has about $90 million of outstanding bond debts, according to budget documents, and another $200 million owed to holders of securities issued by the city’s now-dissolved redevelopment agency. The San Bernardino council voted in July to skip payments of $3.4 million to holders of pension debt as well as $2.2 million owed for retiree health care.

Pensions

Judge Joyce Draganchuk of Ingham County has ruled that a 2011 law requiring members of a state employee pension fund to contribute 4% of their pay toward the fund is unconstitutional. Judge Draganchuk wrote that Public Act 264 infringed on the constitutional authority of the Michigan Civil Service Commission to set compensation for state employees: “By mandating that members contribute 4% of their compensation to the employees’ savings fund, the Legislature reduced the compensation of classified civil servants -- an act that is within the sphere of authority vested in the Civil Service Commission.” The decision, likely to be challenged by the state, had been expected to save the state $5.6 billion in long-term liabilities and ensure “the post-retirement promises made to our employees can be kept.”

Pensionary Tales

Local governments in Michigan would be able to issue general obligation bonds to cover costs tied to shifting to a 401(k)-style retirement plan as well as for other-post employment benefit liabilities under legislation sent to Gov. Rick Snyder Friday. Senate Bill 1129 is an effort to aid local governments’ transition to a less-costly employee retirement system and help bring down retirement liabilities, which some local officials say threaten their fiscal stability. The measure moved quickly through the state House and Senate, which approved it last Thursday with only one change since it was introduced in early summer. “Legislation doesn’t usually move that fast, but this sailed right through,” said Samantha Harkins, director of state affairs for the Michigan Municipal League, which supported the measure. The one change broadens the measure to allow local governments to issue bonds to cover their OPEB liabilities as well as costs associated from closing their defined-benefit plans. The expanded OPEB bonding authority is a happy ending for supporters who for years have pushed for such legislation. To qualify for the borrowing, municipalities would have to agree to close their defined-benefit plans. They would have the option of switching employees to a defined-contribution plan, but could not increase the benefit levels of the closed defined-benefit plan once the bonds have been issued.

Converting to a defined-contribution plan forces the government to pay more in up-front costs, as it triggers accelerated payments under the actuarial accounting method used by Michigan. The new borrowing authority is one way to avoid that penalty, supporters said. If signed by Snyder, the new law will help local governments stabilize their long-term retirement costs, according to Ms. Harkins. “That spiking in costs is going to be difficult,” she said. “This will be a long-term cost savings not only for these communities, but also for the taxpayers who are paying for these benefits, which, in their current form, are unsustainable.” Municipalities that issue bonds under the new legislation must be rated double-A or higher and the Michigan treasurer must approve it. Issuers would be able to pay off all or part of their retirement liabilities with the borrowing. They would have to stay within current debt limits and prove that they can cover the debt payments with general-fund dollars. The bonds would be structured as limited-tax GOs with few other structural restrictions. The first serial or term maturity could not occur later than five years after the date of issuance. The measure will give local governments another tool and more flexibility to pay down their unfunded accrued liability, independent Senate Fiscal Agency analyst Kathryn Summers noted in a June analysis of the legislation. Ms. Summers noted: “However, the actual resulting fiscal impact is unknown and would depend upon the cost of the security compared to market performance, the impact (if any) on the municipality’s credit rating, and the potential risks associated with converting a ‘soft’ debt of the municipality into a ‘hard’ debt with a rigid and fixed repayment schedule.” 

California Dreamin'

California Gov. Jerry Brown has signed legislation to create the nation’s first state-administered retirement savings program for private-sector workers. The new law will establish the California Secure Choice Retirement Savings Program for more than 6 million lower-income, private-sector workers whose employers do not offer retirement plans. Under the new program, employers will withhold 3% of their workers’ pay unless the employee opts out of the savings program, which can be done every two years. It would be administered by a seven-member board chaired by the state treasurer. The board would select a professional fund manager, which could be a private investment firm or the state’s public pension system, to maintain the money. State Sen. Kevin De Leon, D-Los Angeles, introduced the bill earlier this year in response to what he called the “looming retirement tsunami” as millions of lower-wage workers face financial hardship in their retirement years. The new law will not be implemented unless the savings program is projected to be self-sustaining and exempt from federal rules that cover private-sector defined benefit plans. Such plans have to meet minimum standards under the federal Employee Retirement Income Security Act. The legislation also requires the board to submit an annual audit. It was initially opposed by businesses, insurance companies and financial services firms. 

Back to School in the Windy City

Fitch this week lowered its rating of the Chicago Public Schools--its fourth ratings blow of recent months--as the district struggles to cover the $300 million cost of a new, four-year teachers’ contract. Fitch warned that the downgrades may not be over by leaving the rating with a negative outlook. The Fitch downgrade is the second from a rating agency since the school district’s resolution of a seven-day teachers strike last month, its first strike in 25 years. Fitch wrote: “The labor agreement following the recent Chicago Teachers’ Union strike results in considerable increased costs to the Chicago Public Schools…The increases come at a time of highly stressed operations, when Fitch believes spending reductions are imperative to maintaining fiscal stability.” The district closed a $665 million gap to balance its $5.2 billion fiscal 2013 budget over the summer only by nearly draining its reserves. That leaves it little room to cover the $74 million price tag in fiscal 2013 of the four-year teacher’s contract or to manage a $330 million increase looming in its teachers’ pension payment next year. Fitch noted in its report that while the district has cut spending, dramatic changes are needed, but the school district may be hard-pressed to achieve them given its labor strife and likely political opposition to possible school closures: “The coming challenges now appear considerably greater than they have been historically.” At the center of the district’s challenges is the expiration of a state approved three-year pension holiday. The district’s already weak pension funding ratios worsened due to the deferrals and the payment will rise by $338 million to $534 million next year. The district’s teachers pension plan was 59.9% funded at the close of fiscal 2011. The increase next year puts the district on the path to reach a 90% funded ratio by 2059. Other post-employment benefits are similarly underfunded but annual payments are capped at $65 million, leaving an increasing burden for employees and retirees. Moreover, the pension increase comes as the district already faces rising debt service payments to cover borrowing that financed renovations after years of neglect. The district has also in recent years restructured debt pushing off near-term debt service and is planning on restructuring at least $100 million for fiscal 2014 relief.

Indy 500

The Hoosier Department of Local Government Finance reports that Indiana local governments have a total of $34.4 billion of outstanding debt, with the Marion County Airport Authority, Indianapolis, and the city of Carmel topping the list. Of the $34.4 billion, $18.7 billion is lease-backed debt, nearly all of which represents bonds issued by a building corporation that was created to issue the debt. School districts carry the most amount of debt, followed by special districts, then cities and towns, according to the DLGF. More than a quarter of property tax revenue goes toward paying off debt, according to the report: “Payments on local government indebtedness consume a significant portion of property taxes…For property taxes payable in 2012, 26% of the certified levies were attributable to debt service funds. Statewide, debt service levies represent $1.6 billion of the $6.3 billion in certified levies.” Indiana school districts and towns carry the most amount of debt of any subdivision in the state, with a total of $16.9 billion of outstanding obligations. Of that, more than $14.5 billion is lease payments and $172 million is federal credits, which are expected payments from the federal government to subsidize projects that qualify for federal aid. The Marion County Airport Authority, which operates the Indianapolis International Airport, ranks first among all local districts, including special districts, with $2.1 billion of outstanding debt. None of that is lease-backed debt. Indianapolis ranks second among all local governments, with $1.9 billion of debt. The city of Carmel, located outside of Indianapolis, ranks fifth among all districts, with $895.1 million of debt. Of that, $357 million is lease-backed debt. The Indianapolis public school district carries the most debt of all school districts, with $903 million of debt, nearly all of which is lease-backed. Cities and towns carry just under $8 billion, according to the report. Special districts have the second-largest amount of debt, with $6.5 billion. Counties have a total of $1.7 billion of outstanding debt. Copy of Report

New Joisey & You

New Jersey Governor Chris Christie said his administration will order spending cuts in Newark as the state’s largest city starts its 10th month without a budget. Governor Christie told reporters it is “ridiculous” that the city of about 277,000 people, 12 miles (19 kilometers) west of Manhattan, has not approved a plan for the year that began Jan. 1, and that Newark will have to agree to unspecified cuts if it wants state aid to balance its budget. (Newark Mayor Cory Booker proposed a spending plan in February, but it has not been approved yet by the City Council.) Gov. Christie went on to note: “Saying they’re late is like being kind…We are looking very carefully at this budget and I’m unsatisfied with the efforts of this administration and the city council to cut back that budget.” [Newark has lost more than a third of its population since the 1930s, has the 10th-highest poverty rate among major U.S. municipalities.] Newark Business Administrator Julien Neals in a statement said the city has reduced its workforce and is looking to end its reliance on state aid. He called the mayor’s spending plan a “step forward” and said Mayor Booker has cut 1,000 workers and trimmed department spending by more than $70 million since taking office: “Newark is confronting growing financial obligations in the face of a serious and persistent economic downturn. We will continue to work with the state and Municipal Council to end our reliance on transitional aid.” The state gave Newark a $32 million loan last year and the city ended the year with an $18 million surplus, according to Gov. Christie said. Newark has again asked for $24 million, but the Governor said he doubts it needs that much; he expects to reach an agreement with city leaders on a financial-aid package: “Last year I stepped up, the state did, and gave them a $32 million loan. What did I find this year? They had an $18 million surplus from last year on my $32 million loan, OK? Fool me once, shame on you. Fool me twice, shame on me.” Two yea4rs ago, Mayor Booker confronted an $83 million deficit in a $605 million budget as the recession cut revenue and Gov. Christie reduced aid to towns and cities. Newark raised property taxes 16%, sold 16 city-owned buildings, and eliminated about 800 jobs, including 167 police officers. The city’s 2012 application for transitional aid, which helps cities in financial distress, cited a structural deficit, increased pension and health-care costs, and a reliance on non- recurring revenue from a settlement with the Port Authority of New York and New Jersey. Mayor Booker’s spending plan called for a $10 million cut in departmental expenses, to $327 million. This year’s budget had a projected $75 million gap that was reduced to $25 million partly as a result of a tax-lien sale, fines related to red-light traffic cameras, and sales of taxi medallions, according to the aid request.

Property Tax Vacancies

The Census reports that the total number of vacant housing units in the United States grew by over 4.5 million from 2000 to 2010, a 44% increase. Unsurprisingly, vacant and foreclosed homes are not evenly distributed, but rather are disproportionately found in many older industrial cities, particularly those that have lost much of their population and job base over the past several decades. Boarded houses, abandoned factories, and apartment buildings, and vacant storefronts are a common part of the landscape in large cities like Detroit, Buffalo, and Philadelphia, and a host of smaller cities such as Flint, Gary, and Youngstown. For these cities, counties, and public school districts; they create a lasting double whammy—hammering property tax revenues and imposing significant public safety and other costs on eroded budgets.

Harried in Harrisburg

According to a state official, the state’s capitol city, Harrisburg, has enough cash to last through November. The official noted that delaying payments to some vendors could help Harrisburg make it through the end of the year. The official, Fred Reddig of the Department of Community and Economic Development, which oversees the state’s distressed communities, also said the city may issue some tax anticipation notes (TANs) in January if banks are willing. Mr. Reddig said Harrisburg, which remains under state receivership, will have a budget gap of about $15 million by year’s end: “Many municipalities need to address that cash-flow deficit early in the year and that’s where the Tan would come into play, in January, to address those liabilities that are brought forward. The Tan would deal with the deficit in the early couple of months” of 2013.” Harrisburg has about $320 million of bond debt that it cannot pay because of financing overruns to an incinerator retrofit project. The receiver’s office has also issued requests for proposals to lease or acquire the sewer and wastewater systems, and is negotiating exclusively with the Lancaster County Solid Waste Management Authority over the incinerator. Harrisburg’s largest vendor is Highmark Inc. of Pittsburgh, which provides non-prescription coverage to municipal employees. Although the city owes Highmark roughly $1.5 million, the carrier has not threatened to shut off coverage. To which Reddig warns: “The point is that the city needs to be in communication with their major creditors, much the same way you or I would need to talk with a creditor if we couldn’t make a mortgage payment. If you communicate with a vendor, it is less inclined to take action. If you let the lender know, it provides the lender some level of comfort.” Meanwhile, Harrisburg’s chief operating officer, Ricardo Mendez-Saldivia, reported that the city’s accounting firm Trout, Ebersole & Groff LLP has stopped work on the city’s 2010 and 2011 audits because the city has yet to pay the firm. Mr. Mendez-Saldivia reports that the 2010 audit is 90% finished, but only minimal work has been done on 2011. Tomorrow, the Commonwealth Court of Pennsylvania will hear oral arguments about the City Council‘s appeal of an order by Lynch to double the earned-income tax to 2% from 1%. In addition, the Pennsylvania Senate is scheduled to begin hearings on the incinerator bond financings tomorrow.