Detroit's Emergency Manager Kevyn Orr recently announced that he will make his decision on filing a petition under Chapter 9 of the Bankruptcy Code in about five weeks. Within that timeframe, Orr will try to speak with the city's many labor unions and make progress on many other goals. 

Orr's plan involves designating a new police chief, restructuring the fire department via an outside expert, maximizing the efficiency of the public transportation system, speeding up demolition of blight, and analyzing the pension systems for potential modifications. He has placed a high emphasis on change and quick improvements based on evaluations of the city's  continually worsening financial state.  

A recent study by the California Public Policy Center concluded that the combined debt owed by California’s state and local government entities is likely to exceed $1.1 trillion dollars. The CPPC totaled the debt of state government ($132.6 billion), public school districts ($49.7 billion), city governments ($68.1 billion), county governments ($22.1 billion), redevelopment agencies and “special districts” ($110.4 billion) and unfunded state and local government pension obligations (from $265.1 to $586.4 billion). 

In addition to the eye-popping total, the report also raises interesting points about the nature and amount of the state’s debt.

CPPC argues that current estimates of California’s pension obligations vastly underestimate the scale of the amount of unfunded obligations. State estimates generally assume a rate of return on pension fund investments of 7.5%. CPPC believes a rate of 5.5% or even 4.5% is more realistic. Correcting for this error adds $321.3 billion to pension...

Politics undoubtedly influence the public narrative surrounding a municipality’s slide into bankruptcy. Last week, however, the Securities and Exchange Commission served notice that public officials need to be careful of what they say. For the first time ever, the SEC charged a municipality, Harrisburg, Pennsylvania, with violations of Section 10(b) of the Exchange Act and Rule 10(b)(5) for making materially misleading statements.

While Harrisburg filed a Chapter 9 petition in October of 2011, the petition was dismissed on the grounds that the bankruptcy filing was not authorized under Pennsylvania law. Instead, a receiver was appointed to implement a “recovery plan” and take control of the city’s finances. The city remains under the control of the receiver.

The charges from the SEC cover a two-year period, from January 2009 through March 2011 and relate to statements made by Harrisburg officials, including a “State of the City” address made in April 2009 by the mayor. According to the...

Goodwin Procter partner and MuniBK contributor Deborah Schrier-Rape recently acted as a moderator for the Commercial Real Estate Women Los Angeles (“CREW Los Angeles”) panel entitled, “Public Finance in a Sea of Challenge: A Look at What Has Come and What is to Come.” The panelists discussed what public financing transactions are getting done with tax laws in flux and cities contemplating municipal bankruptcy, and what the prospects are for public finance going forward.

Speakers at this CREW Los Angeles monthly luncheon included: Marla Bleavins, Project Manager at Los Angeles World Airports; Stephen E. Heaney, Managing Director of Stifel Nicolaus & Company, Incorporated; Barbara Lloyd, Managing Director of KPMG Corporate Finance LLC; and, Andrea Caruso Townsend, Of Counsel at Squire Sanders. 

Please click here to access a portion of the power point presentation that guided the discussion.

CREW Los Angeles is an organization seeking to advance the careers and success of women...

On February 22, Goodwin Procter partner and MuniBK contributor Lewis Feldman will participate in the 9^th Annual Wharton Restructuring and Distressed Investing Conference entitled, “Health of Nations: Distress, Recovery, or Revival”  which is the largest restructuring and distressed investing-focused school-run conference in the United States. This year the conference will be held at the Hyatt at the Bellevue in Philadelphia, Pennsylvania.

Lewis will be featured as a speaker in the panel entitled, “Financial Restructuring: Muni Storm on the Horizon” along with Jamie Baird, Managing Director, Blackstone; Sean Gumbs, Senior Managing Director, FTI Consulting; James E. Pass, Managing Director, Portfolio Manager, Guggenheim Investments; and, Rebecca Rhynhart, Budget Director, City of Philadelphia. William J. Nolan, Senior Managing Director, FTI Consulting will moderate the panel which will discuss the indicators of distress, venues, key players, legal framework and municipal bond markets, and...

On February 13, Goodwin Procter partner and MuniBK contributor Deborah Schrier-Rape will moderate the Commercial Real Estate Women Los Angeles (“CREW Los Angeles”) panel entitled, “Public Finance in a Sea of Challenge: A Look at What Has Come and What is to Come.” The panel will discuss what public financing transactions are getting done with tax laws in flux and cities contemplating municipal bankruptcy, and what the prospects are for public finance going forward.

Speakers at this CREW Los Angeles monthly luncheon will include: Marla Bleavins, Project Manager at Los Angeles World Airports; Stephen E. Heaney, Managing Director of Stifel Nicolaus & Company, Incorporated; Barbara Lloyd, Managing Director of KPMG Corporate Finance LLC; and, Andrea Caruso Townsend, Of Counsel at Squire Sanders.

CREW Los Angeles is an organization seeking to advance the careers and success of women in commercial real estate by providing opportunities for business development and professional growth.

To find...

Goodwin Procter partner Lew Feldman was recently quoted in an article in The Bond Buyer entitled, “California Preventing Former RDAs From Spending Bond Proceeds” by Keeley Webster.

The article reports that according to data compiled by a local official, about $1.5 billion in California redevelopment agency bond proceeds are in limbo. State government and local officials are engaged in a debate as to whether agencies had any right to issue the bonds as they were issued in the period after Governor Brown announced his proposal to eliminate redevelopment but before lawmakers passed the legislation to do so.

To read the full article, click here.

Michigan’s lawmakers passed new legislation that expands a local government’s options in bankruptcy.  Under the state’s old law, only an emergency manager, with the governor’s permission, could declare bankruptcy on behalf of a government entity. The new legislation allows for a local government to file Chapter 9 earlier in the process. The governor still needs to provide final approval, but in light of Detroit’s financial woes, legislators determined that other options should be available to assist in resolving Detroit’s insolvency. SB 865 provides that if a local government is in a state of financial emergency, the governing body has seven days to select one of four options:

1. Opt for a consent agreement with the state;
2. Appoint an emergency manager;
3. Begin a neutral evaluation process with a mediator; or
4. File for Chapter 9.

The law also gives the local governing body and the mayor the ability to vote out an emergency manager after one year and replace the manager with a mediator. If signed...

CalPERS has fired back at the city of San Bernardino and its pendency plan for operating during the Chapter 9 case, calling it  “criminal” and a “sham.” A copy of the pendency plan can be found here. Since filing for bankruptcy, the city has stopped making its bi-weekly payments to CalPERS. As a result, San Bernardino now owes CalPERS approximately $8 million. 

While CalPERS may cast aspersions on the city’s motivation, financially, the city is faced with either making the CalPERS payment or making its payroll. Even though the hit to CalPERS is 0.00329% of its overall portfolio, CalPERS has a legitimate concern that any acquiescence to San Bernardino’s refusal to pay will set a negative precedent for future Chapter 9 cases. As there are pending municipal bankruptcies underway throughout the state, CalPERS does not want to undermine its position that it is a priority creditor for the municipalities of California. 

The legal issue is whether the pensions of government workers take...

In the final segment of MuniBK’s panel, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22^nd annual California Public Finance Conference, panelists examine and discuss:

• Consensus building, compromise and deal-making;
• Constraints on parties’ ability to make a deal because certain provisions key to Chapter 11 are inapplicable to Chapter 9;
• Whether states can help municipalities avoid Chapter 9;
• How municipal bankruptcies impact bond pricing;
• Jurisprudential impact of Chapter 9 decisions on bankruptcy courts; and
• How to judge success of municipal bankruptcy cases.
   

The third video segment of MuniBK’s panel, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22nd annual California Public Finance Conference focuses on:

• Challenges faced by municipalities that have a “top line” problem;
• An analysis of certain types of municipal debt and a municipality’s willingness to pay;
• Elements of "fairness" including pension reform and retiree benefits;
• The “firewall” between general obligation bonds and special revenue bonds in Chapter 9; and
• Legal fees and other costs of restructuring.
 

The second video segment of MuniBK’s panel “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22^nd annual California Public Finance Conference focuses on the nuts and bolts of a Chapter 9 filing including:

• The ability of a municipality to impair contracts in Chapter 9;
• The limitations on a bankruptcy court in a Chapter 9 proceeding;
• Some key differences between Chapter 9 and chapter 11;
• Challenges to eligibility in a Chapter 9 case;
• Creditor negotiations and benefits of filing;
• A discussion about the Jefferson county filing; and
• What do to once a municipality is determined to be a valid Chapter 9 debtor.

Goodwin Procter recently sponsored the Bond Buyer’s 22^nd annual California Public Finance Conference and led a breakfast round table discussion on current topics in Chapter 9 municipal bankruptcy cases. Over the next few weeks, the MuniBK blog will post video segments from the panel entitled, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know.”

The first video segment introduces the panelists and moderator:

Lewis Feldman, Partner, Goodwin Procter LLP

Emanuel Grillo, Partner, Goodwin Procter LLP

Christopher Klein, Chief Judge, United States Bankruptcy Court for the Eastern District of California, overseeing Stockton's current Chapter 9 filing

William Nolan, Senior Managing Director-Corporate Finance, FTI Consulting Inc.

Part I also examines:

• Chapter 9 cases owing to project failure vs. “top line" problems;
• Roles “typical” distressed investors may play in chapter 9 cases; and,
• How quickly distressed municipalities can recover and move forward.

Detroit is in a state of crisis. In addition to the “traditional” municipal financial woes of decreasing revenue, legacy pension burdens, and an increased demand for services, Detroit has several more practical and unique problems. 

First, according to the Wall Street Journal, there has been a mass exodus from the city of Detroit. Almost 25% of Detroit’s total population left the city between 2000-2010. The resulting smaller tax base has led to a “top line” revenue problem for the city. 

This exodus has also contributed to a second problem. From a land mass perspective, Detroit is simply too large with only 713,000 residents spread across 139 square miles. This geographic sprawl makes providing basic municipal services inordinately expensive. There are neighborhoods with literally more abandoned houses and buildings than residents.

Consequently, Detroit mayor, former NBA star Dave Bing, has proposed plans for the revitalization of certain areas, including the city’s waterfront, in the...

Last week, MuniBK reported on the objections to San Bernardino’s Chapter 9 petition filed by the San Bernardino Public Employees Association and CalPERS.

The city’s bondholders did not object to the filing, and now the holders of more than $100 million of the bonds, originally issued to fund San Bernardino’s obligations to CalPERS, have filed a pleading supporting the city’s eligibility for Chapter 9.  

It appears that these bondholders and bond insurers do not want to give CalPERS two proverbial bites of the apple: one to see how a pendency plan will treat the CalPERS’ obligations and another to later contest overall eligibility based on dissatisfaction with the treatment of those obligations under any proposed plan.

In their filing, the bondholders also urged the Bankruptcy Court to allow the Chapter 9 process to move forward quickly. A brief news report on the filing can be found here. 

Part One of this post, Payment of Bonds in Chapter 9: Special Revenue v. General Obligation, discussed the impact of California’s municipal financial distress on holders of municipal bonds and how such bond obligations are treated under Chapter 9 of the Bankruptcy Code.  The answer depends largely on whether the bonds were issued as special revenue or as general obligation bonds.

One factor influencing what bondholders can expect to recover in a Chapter 9 proceeding is what the municipality can deduct for “necessary operating expenses.” With general revenue bonds, the answer is relatively simple: all expenses will be deducted before there is any payout to bondholders.  While the Bankruptcy Code includes a carve-out which permits a municipality to deduct “necessary operating expenses” from revenues generated by special revenue bonds, it is  not specific as to whether expenses for the Chapter 9 proceeding may be included and deducted as “net operating expenses.” While most commentators...

Municipal bondholders have a special interest in the cases of those California cities that have filed for protection under Chapter 9 of the Bankruptcy Code. They have undoubtedly questioned how their bonds will be treated under Chapter 9.

The answer depends largely on whether the bonds were issued as special revenue or general obligation bonds. A special revenue bond is repaid solely from revenues generated by the project or system from which the revenues are derived. A general obligation bond, on the other hand, is generally paid from tax revenues and are backed by the full faith and credit of the issuing municipality.

In addition, whether the municipality can deduct payments from special revenue bonds for “necessary operating expenses” may depend (at least according to one recent bankruptcy court decision) on whether the revenue bonds are based on gross or net revenue. 

Prior to 1998, all municipal bonds were treated equally under Chapter 9, regardless of whether they were special...

As lawmakers discuss ways to avoid the so-called “fiscal cliff,” their short-hand for the parade of budgetary horribles (increased taxes and forced service cuts) that will take place on January 1, absent bi-partisan Congressional action, investors may want to consider the potential impact on municipal bonds.  Since Congress, in part, will focus on ways to raise revenue (taxes) without across-the-board tax increases, the tax exempt status of municipal investments may come into question. 

Generally speaking, under the current framework, interest earned on municipal bonds is exempt from federal and state taxation. This is in contrast to investments in corporate bonds or even treasury bills, making municipal bonds a more attractive (and potentially more lucrative) investment. If this preferential tax treatment is reduced or eliminated, it would not only make investments in municipal bonds less attractive to individual investors, but also reduce the appetite for investments in mutual funds...

The Bond Buyer’s 22nd Annual California Public Finance Conference took place last week in San Francisco. Chief Judge Christopher Klein, leader of the United States Bankruptcy Court for the Eastern District of California, who is currently overseeing the bankruptcy proceedings for Stockton, CA, participated in a Breakfast Roundtable entitled “OpporMUNIties in Chapter 9: What Distressed Investors Should Know.”   The panel also included Bill Nolan of FTI, and MuniBK Blog contributors Manny Grillo and Lew Feldman.

Copies of the materials distributed by the panelists at that meeting can be found here. Video of the roundtable discussion will be posted soon on MuniBK.

The panelists discussed topics including:

• Limitations of the Bankruptcy Code in offering Chapter 9 relief to municipalities;
• Precedential impact of any Bankruptcy Court Chapter 9 decision on other pending municipal bankruptcy cases;
• The ability of states to “step in” and offer distressed municipalities other alternatives;
•...

Chief Justice Christopher Klein, leader of the United States Bankruptcy Court for the Eastern District of California, who is currently overseeing the bankruptcy proceedings for Stockton, CA, will be participating in a Breakfast Roundtable entitled “OpporMUNIties in Chapter 9: What Distressed Investors Should Know” at The Bond Buyer’s 22nd Annual California Public Finance Conference on Thursday, October 18, from 7:30-8:30 am PST.  

Chief Justice Klein will be joined by speakers Lew Feldman, Partner, Goodwin Procter LLP; Emanuel Grillo, Partner, Goodwin Procter LLP; and William Nolan, Senior Managing Director – Corporate Finance, FTI Consulting, Inc. 

The panel will be recorded and portions thereof will be featured on blog.MuniBK.com in the near term.