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.”