Pensionary Potential Pitfalls

If the California Public Employees’ Retirement System prevails in having courts define San Bernardino’s obligations to the pension fund as immutable in the city’s bankruptcy case, it could have widespread ramifications including sweeping bond downgrades, according to Matt Fabian, managing director of Municipal Market Advisors (MMA): “With recent rating agency actions taking a dimmer view on California general fund obligations generally, we suspect success by Calpers would trigger sweeping downgrades across the state…We also assume a strong pullback by lenders, perhaps exceeding the rating impact, implying steep funding costs for issuers attempting to sell new lease debt.” If CalPERS succeeds, lease-backed debt such as certificates of participation may be untenable, the report said. Protections afforded pension funds in the California state constitution have also hampered efforts by the state and cities to reform the benefits of current employees. MMA estimates California local governments have about $33 billion in outstanding COPs, plus more unsecured, general fund backstopped debt, noting: “If pension obligations cannot be adjusted—even in bankruptcy—this debt will be effectively subordinated to a permanently-extendable obligation to Calpers.”

San Bernardino

The California city’s road to federal bankruptcy protection is now confronted by a major state obstacle from the city’s largest creditor, the California Public Employees’ Retirement System or Calpers. The city, which filed its plan in U.S. Bankruptcy Court last Friday, outlining how the city will conduct its finances while it works its way through the bankruptcy process, also filed documents responding to objections to its eligibility for bankruptcy from Calpers and a city employees union, with the city arguing that the city union and Calpers objections are without merit and were filed “despite ample and compelling evidence of the city’s eligibility for Chapter 9 relief.” Calpers had filed its motion the day after the city council voted to approve its request for Chapter 9 protection and requesting relief from an automatic stay that prevents it from suing the city in state court over $6.9 million in missed payments. Calpers asserts that a federal bankruptcy court does not have the jurisdiction under Chapter 9 bankruptcy code to order the city to pay its bills, but the state court does: “This legal action would allow us to collect the employer contributions from San Bernardino which are required by state law, to maintain the integrity of the San Bernardino pension plan for its public employees and retirees,” CalPERS chief executive officer, Anne Stausboll, said in a statement. San Bernardino’s pendency plan would defer $12.9 million in Calpers payments until fiscal 2013-14 to help close the insolvent city’s $48.5 million budget gap. The plan also mentions negotiations with Calpers’ actuarial staff to reamortize its pension fund liability over the next 30 years for a fresh start for a $1.3 million savings per year. San Bernardino, however, plans to make some payments to Calpers in fiscal 2012-13 and is working to negotiate repayment with the pension fund, according to court documents filed by the city.

Catch-22. In the Chapter 9 case involving Stockton, insurance companies filed motions against the city as it remained current on its Calpers payments while defaulting on its bonds, but San Bernardino is saying in its pendency plan that it does not have sufficient resources to fund the bankruptcy case and cover expenses that protect the public health, safety and welfare of its citizens (e.g. essential services). The guru of municipal bankruptcy, in response to a question from Bloomberg this week aptly replied:

“You can impair contract obligations where it’s necessary for a higher public good. That’s why you can condemn property. The higher public good is that we’re not going to forfeit essential public services to pay for pensions that are not affordable. That’s part of the legal basis. You could set up a quasi-judicial body that makes fact determinations. Both the city and the state and the unions could present their sides and they’ll make the determination.”

San Bernardino submits its spending plan this a.m. The City believes its plan will resolve the chief complaint of the California Public Employees’ Retirement System, according to its papers filed in U.S. Bankruptcy Court. Calpers is seeking to sue San Bernardino over missed pension payments as well as asking U.S. Bankruptcy Judge Meredith A. Jury (really) to dismiss the city’s Chapter 9 petition. Should Judge Jury grant either request, Calpers would be free to sue San Bernardino in state court to seize property or find some other way to collect the debt the pension fund is owed. Calpers spokesman Brad Pacheco said he couldn’t immediately respond to a request for comment on the filing. In August, San Bernardino became the third California city to file bankruptcy in less than three months. 

Pensionary Disclosures

GFOA, in a new best practice document, wrote that state and local government issuers with pension obligations that could either affect their ability to pay debt service or hurt their financial condition should consider disclosing more pension information in their official statements. The document, recently approved by GFOA’s executive committee, says that for more extensive pension disclosures issuers should refer to guidance published in May by the National Association of Bond Lawyers. NABL worked on that guidance for more 15 months with a dozen muni market groups, including GFOA. Traditionally, most state and local governments have taken the pension-related information in their comprehensive annual financial reports, or CAFRs, and replicated that in their official statements, according to John Tuohy, deputy treasurer of Arlington County, Va., who worked on the GFOA best practice document. The organization now writes that if state and local governments’ pension obligations could be material to their debt service payments or could otherwise affect their creditworthiness, they may need to go further with their disclosures. The GFOA document recommends issuers develop procedures for determining the level of pension information that needs to be disclosed in their official statements. It says state and local governments should ask themselves a series of questions, including if the debt service on the proposed bond issue would be dependent on the same revenue source or sources as the pension obligations. Other key questions are whether there are pension-related legal restrictions or requirements that would place pension funding senior to debt service payments and whether there are pension-related trends that would be material to investors. The GFOA document says that if the answers to these questions show pension obligations could adversely affect the ability to pay debt service, then issuers should refer to the NABL paper, particularly its Appendix D, and should consider other sources for additional disclosures. These may include the pension plan’s actuarial reports, legal and legislative actions affecting pension plans or obligations, and pension information included in the government’s adopted budget.

Chocolateville

Former Central Falls Mayor Charles Moreau agreed to a plea agreement admitting guilt to federal charges that he accepted illegal gratuities from a friend and political supporter who received lucrative work from the city boarding up abandoned buildings. Earlier Mr. Moreau resigned as mayor, a post to which he was first elected to in 2003; he now faces a prison sentence. Between 2007 and 2009, the friend, Mr. Bouthillette, a businessman who specializes in post-disaster cleanup work, boarded up at least 167 Central Falls homes, reaping “unreasonable profits, amounting to hundreds of thousands of dollars,” according to federal court papers. As a “reward,” Mr.  Bouthillette “on three occasions corruptly gave Mayor Moreau things of value,” according to the federal information, charging the two men with two counts of fraud. Mr. Bouthillette helped former Mayor Moreau buy a new furnace for his house in Central Falls, provided free renovations to his home in Lincoln, and, in April 2010, provided free flood remediation work at the Lincoln home after heavy spring flooding that year. The information describes how Moreau circumvented competitive-bidding rules by declaring that each vacant home was an “emergency.” Moreau directed city officials to find vacant buildings to be boarded up, and identified buildings himself. He reduced the time the city gave property owners to board up their own homes from seven days to 24 hours. Some homes were boarded up even though people were still living there. Others were re-boarded by Mr. Bouthillette at Moreau's direction, even though the owners had already had their own contractors board the building. Under the plea agreement, Moreau agrees to pay a fine of at least $6,400. For his part, Mr. Bouthillette agrees to contribute $160,000 to the government, which “shall be used to make grants for educational, public safety, social services or housing programs in Central Falls that redress the harm caused by the defendant's criminal conduct,” and he agrees to relinquish to the city any further monies he is owed for boarding up properties, which is estimated to be about $277,000. The young upstart clashed several times with the experienced former mayor during two marathon debates on Sunday afternoon at the Forand Manor and Wilfrid Manor on opposite sides of the city. 

Meanwhile, James Diossa, a city councilman,  won a big victory in Central Falls' nonpartisan mayoral primary on Tuesday and will move on to face former Police Chief James Moran in the general election next month. Mr. Diossa had  battled with ex-Mayor Thomas Lazieh over the Donald W. Wyatt Detention Facility which has not provided the city with a dime in almost four years. In the past, the jail used to pay the city as much as $525,000 for allowing it to operate in the city. Lazieh boasted that he was responsible for bringing the facility into the city and creating jobs. Diossa went right after the former mayor, blaming him for signing off on a deal that required the bondholders to get paid before the city.

Municipal Sewerage Distress

A proposal by Jefferson County to factor corruption into future sewer system rate increases is setting the stage for another legal fight with the trustee for the system's $3.2 billion of defaulted sewer warrants. The county, in addition to corruption that increased costs of rebuilding the system, is proposing to factor in a new valuation of system assets that could be significantly less than the outstanding debt. Those elements, as well as an overhaul of the system rate structure anticipated to result in an estimated 5.9% increase in revenues, were set to be considered when county commissioners held their only public hearing on rates for the first time since at least 2008. The proposed rate increase is one of the first major steps the county has taken since filing the largest municipal bankruptcy in the nation last November with more than $4 billion of outstanding debt. Bank of New York Mellon, trustee for the sewer warrants, in its court filing, wrote that it wants a detailed financial examination of sewer system records, because the county has not clearly explained income and expenses of the system since regaining control of it in January from a state-court appointed receiver. The bank also objected to the county’s complex plan for evaluating future rate increases, and objected to considering them based on the value of the system as well as past corruption. Rates should be based on claims for paying the outstanding debt, according to the bank: “To the extent the county’s own fraud, graft, corruption, waste, and gross incompetence in the construction of the system resulted in the county spending more money than it might have otherwise spent on the system but for such misconduct, it is unimaginable that the warrant holders who loaned the money to improve the system should bear the consequences of the county's actions.” BNY Mellon also complained that the county’s proposal lacked detail. Federal bankruptcy Judge Thomas Bennett has been asked to consider the trustee’s request for a financial examination during a regular hearing scheduled for next Thursday. In the nonce, Judge Bennett scheduled an expedited hearing to consider Jefferson County’s motion to bypass lower courts and appeal directly to the 11^th Circuit Court of Appeals.

Wolverine Reversal

Michigan voters this week voted to overturn last year’s state law that gave state-appointed emergency managers broad powers to cut spending and avoid bankruptcy for financially stricken cities and school districts, repealing Public Act 4. That law, requested by Governor Tick Snyder, allowed the state to intervene more quickly to prevent insolvencies or have more power to reverse financial collapse. The law was intended to replace a 1990 statute that gave emergency managers less authority. Public Act 4 allowed managers to assume the powers of mayors, city councils, and school boards, to fire employees, sell assets, and cancel union contracts. When the referendum was placed on the ballot in August, Michigan had four cities and three school districts under emergency managers. In the wake of the vote, Governor Snyder warned that overturning the state’s controversial emergency management law could lead to municipal bankruptcies for some of the state’s most troubled jurisdictions: “Bankruptcies could have a greater likelihood of happening…We could have a situation of not having a manager who can do their work more effectively and faster, and the probability of municipal bankruptcy could increase because that could be the only option left to them: I still think there are a lot of negative consequences of municipal bankruptcy, if you look at places like California.” No local government has ever declared bankruptcy in Michigan, which has a high number of struggling cities and school districts. The voter-rejected law, Public Act 4 significantly broadened the state’s authority to intervene in troubled communities as well as the powers of emergency managers, giving them the ability to terminate or unilaterally amend labor contracts. The disputed—and now rejected—law had been suspended since late August, when the state election board approved the repeal question for the ballot. Michigan is currently operating under its previous, less powerful, law for fiscally stressed governments, Public Act 72. (There are currently eight governments in state-controlled emergency management status.) PA 72 itself is not without trials and tribulations: opponents filed a lawsuit last month arguing that the revival of the previous law is illegal. A hearing on the case is set for after Thanksgiving. Faced with such a potential loss, Gov. Snyder said a court-mandated overturn of PA 72 would pose a big problem for the state: “Then there would be no emergency manager law, and that would be a concern….That would really cause me to say that we need to be having a legislative discussion because we need some tools.” The emergency manager of Detroit Public Schools, Roy Roberts, warned last week that he would leave the position if the law were overturned. Under PA 4, Roberts controlled DPS’ fiscal and academic polices, but he controls only the fiscal side of the district under current law. Gov. Snyder said he plans to meet soon with top legislative leaders to discuss the possibility of new legislation that would replace some of the powers of Public Act 4—including the less controversial, but still-effective provisions of PA 4 such as an early-warning system for when local governments are facing fiscal stress.

Let's Get the Pit out of Pittsburgh!

Pittsburgh, once in significant fiscal distress, is now seeking removal from the state’s “distressed” status. Scott Kunka, the Three River city finance director, notes: “In 2004, we were on the verge of missing payroll and our bonds were junk…We have made systematic improvements, have gotten upgrades from the bond rating agencies, have balanced budgets and a large surplus, and have reduced our debt.” The city yesterday was scheduled to formally appeal to Pennsylvania’s Department of Community and Economic Development to remove its stigma. More importantly, the PFM Group, which serves as the city’s Act 47 coordinator, notes: “There’s a strong management team at City Hall on the budget side.” Pittsburgh has reduced its debt from $824 million in 2006, when Mayor Luke Ravenstahl took office, to $581 million, and expects to lower it to $490 million in 2014, according to Mr. Kunka. Over nine years, the mayor and city council have embraced changes required by the Act 47 plans in 2004 and in 2009, when the city updated its plan. It has reached labor agreements with eight of nine city unions and downsized municipal government by 25% from January 2000 to January 2012, scaling down some city services and putting out others for competing bids from private providers. Pittsburgh has also worked out shared-services agreements with neighboring communities.  The city and its recovery coordinators anticipate completely paying off existing debt by 2026, meeting best-practice standards. In addition, the city has lowered its debt as a percent of its operating budget from 24% to about 18%, and expects to lower the ratio to 14% by 2017 or 2018. Last January, Moody’s and S&P revised their outlooks to stable from negative after city officials visited the rating agencies in New York and pitched upgrades. Moody’s rates the city’s general obligation bonds A1, while Fitch Ratings and S&P assign A and BBB, respectively. The law firm also participating with oversight responsibilities of the Steel City under Act 47 has cited Pittsburgh’s structurally balanced operating budget with recurring revenues consistently outpacing expenditures: “After weathering a deep recession while preserving its operating balance and reserves, the financial outlook for the City of Pittsburgh is positive.” Fred Reddig of the state department of Community The hearing, rescheduled from last week after Hurricane Sandy hit the Northeast, will be at 3 p.m. in the City Council chambers. Fred Reddig, a DCED official and the head of the governor’s center of local government service, will preside. There is no statutory deadline for the decision, but the city could expect one by the end of November. Because of continued legacy employee costs, Pittsburgh will remain under the budget purview of the Intergovernmental Cooperation Authority, which oversees so-called second-class cities. Pennsylvania groups its cities by population tiers. A member of the law firm oversight team commented: “Overall, the Act 47 program is a partnership between the affected community and the oversight team. It’s not a receivership, like some states have. Critics say it’s hard to get out, but Pittsburgh has shown that with the right plan of action, you can get out.” Nevertheless, Pittsburgh still confronts serious challenges, notably in pension funding, which is around 59%. As of January 2009, Pittsburgh’s combined pension plans were funded at merely 34%. A law passed that year requiring the state to absorb city plans if they remained at less than 50%, would have forced a spike in Pittsburgh’s contributions. To counter that, the city boosted its pension funding levels by earmarking $736 million of parking tax revenues as a new funding source through 2041.