In the continuing saga of Chapter 9 petitions in San Bernardino and Stockton, California, the cities' largest creditor, CalPERS, has petitioned the Bankruptcy Court to disqualify counsel for National Public Finance Guarantee (NPFG), the cities’ bond insurer.

CalPERS alleges that Winston & Strawn, counsel for NPFG, hired lawyers from K&L Gates that had previously worked on CalPERS matters, causing a conflict of interest.  

NPFG wants CalPERS to take a cut in the payments otherwise allowed to CalPERS.  They hired Winston & Strawn to represent it in the Chapter 9 cases, but certain of those lawyers had worked on CalPERS matters.  

A hearing is set for June 5, 2013, on the San Bernardino's eligibility for Chapter 9 (Stockton was already approved as a Chapter 9 case) and motions made by CalPERS and two city employee unions seeking relief from the automatic stay to sue in state court.

In his first report as Detroit’s Emergency Manager, Kevyn Orr outlined the city’s problems. To those familiar with the situation, there were no surprises about the top level interrelated problems facing  Detroit: urban sprawl/blight, soaring and unsustainable union contracts and pension liabilities, a history of municipal “borrowing from Peter to pay Paul,” archaic infrastructure, and systemic municipal inefficiencies. The result is a current negative cash position of $162 million and the blunt assertion that debt payment on current obligations will not be made in order to prevent the city from running out of cash. Moreover, Detroit has in all likelihood lost its access to capital in the marketplace given its current credit ratings, the amount of outstanding debt, and its stated inability to repay the obligations. As a result, the solution must be a comprehensive overhaul of the current municipal system. 

Addressing problems of this magnitude will require widespread, comprehensive...

While much of the focus in municipal bankruptcies has been on cities that have actually filed for Chapter 9 relief or appear to be on the precipice of doing so, there are numerous other municipalities that could be heading down that path, absent a dramatic change in circumstance. 

Recent reports indicate that as many as 40% of hometowns in Pennsylvania may be headed for financial trouble. Most officials point the finger at municipal pensions that are “out of whack” with the current tax base of the municipality, especially as the residents of the towns age and decline. Restructuring these obligations can be a political hot potato. A recent bill has proposed changes to the pension rules for new workers.  While this will likely bring opposition from the unions, compromise is the key to avoiding a bankruptcy filing. 

While Pennsylvania has Act 47 to help stressed and distressed municipalities attempt to solve their problems short of a Chapter 9 filing, New York Governor Andrew Cuomo...

In San Bernardino, California, a fight is brewing regarding the scope of Section 903 of the Bankruptcy Code. It stems from the motions filed by the San Bernardino Public Employees Association (SBPEA), the San Bernardino Police Officers Association (SBPOA) and the San Bernardino City Professional Firefighters (SBCPF) in response to the city’s motion to reject collective bargaining agreements with these unions.  These groups are seeking relief from the automatic stay to pursue various state remedies. The issue to be decided by the Bankruptcy Court is whether the city’s rejection of the collective bargaining agreements is an impermissible violation of state law.

The city contends that the Bankruptcy Code clearly gives it the authority to reject executory contracts, including collective bargaining agreements. The unions, on the other hand, argue that the city’s proposed rejection violates state law. 

The dispute was made more contentious when the California Public Employees’ Retirement...

This guest post was contributed by Marti Kopacz, Founder and Managing Principal of Brant Point Advisors LLC.

Kevyn Orr, Detroit’s newly appointed emergency manager, is going to try. Restructuring professionals have long pondered the advantages and disadvantages of solving public sector problems with private sector strategies. As Orr prepares to take control of what may be the country’s most dysfunctional municipality, he has made it clear that the problem solving will be “data driven.” In other words, politics are way down on the list of considerations and maybe even not on the list at all.  Governor Snyder’s selection of Orr was superb: a top notch restructuring professional with Michigan ties (Michigan University and law school grad), deep familiarity with southeastern Michigan thinking as a result of his experience in the Chrysler restructuring, but without the complications of being a community “insider.”

Orr’s three-prong approach: maintain and grow city services, address...

On Friday, Michigan Governor Rick Snyder published a formal declaration that a financial emergency exists in Detroit. As a result, unless opponents can convince the Governor to change his mind, a three-member emergency loan board appointed by the Governor will select an emergency manager. 

Governor Snyder’s announcement was, in effect, a confirmation of the state financial review team’s conclusion reached on February 19, 2013 that a financial emergency exists in Detroit because there is no satisfactory plan to resolve its extensive fiscal problems. The financial emergency process is occurring under Michigan’s 1990 emergency financial manager law, which became effective again in November after voters repealed a stronger financial manager law by referendum. A new law, passed in a lame duck legislative session and signed by Governor Snyder in December, does not become effective until March 27, 2013. The new law, once in effect, will give the emergency manager increased power, including...

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...

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...

After San Bernardino threw the first punch in round one of the pension wars by refusing to pay amounts owed to CalPERS, the San Bernardino Public Employees Association (“SBPEA”) and CalPERS have now responded with blows of their own by filing objections to San Bernardino’s Chapter 9 petition. 

CalPERS, the nation’s largest public pension system and San Bernardino’s largest creditor, filed what it termed a “preliminary” objection.  This preliminary objection requests that the Bankruptcy Court defer all determinations regarding San Bernardino’s eligibility for Chapter 9 relief until the city presents a feasible plan of adjustment, demonstrating how prepetition claims and ongoing operating expenses will be paid. CalPERS argues that “[t]he city’s financial records are in disarray” and that it is impossible to determine, at this point, whether the city has met the Chapter 9 eligibility requirements.  CalPERS also argues that that the Chapter 9 petition was not filed in good faith, as San...

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.

Throughout the United States, many municipalities are facing severe financial distress and being forced to examine Chapter 9  -- the section of the Bankruptcy Code governing municipality eligibility -- as a means of eliminating debt and restructuring their obligations. 

While the causes of financial distress vary among municipalities, municipal creditors are often composed of the same groups, a mix of “ordinary people” such as pensioners and civil servants, combined with sophisticated financial institutions and bondholders. 

Add these diverse constituencies to the current political environment, mix in the fact that municipalities must often raise taxes to raise revenue, and the result is often a prolonged political battle that provides little progress towards a real solution.

It is often overlooked that the Bankruptcy Code itself attempts to alleviate the potential for stalemate and assuage fears that if bankruptcy is “too easy” there will be a rash of unnecessary municipal filings. The...

Several Pennsylvania cities, like other municipalities around the nation, are facing tough economic conditions: shrinking tax bases, increasingly unfunded legacy pension obligations and a growing demand for social services. Pennsylvania first enacted Act 47, a program to help distressed municipalities, 25 years ago as a response to problems faced by the state’s former steel industry towns. A list of the Pennsylvania municipalities that have utilized Act 47 can be found here. 

In light of the problems facing Scranton and Harrisburg, Pennsylvania lawmakers are now re-examining this law to determine what changes need to be made to address the problems facing their municipalities today. Act 47 already gives local lawmakers the tools they need to address union contracts, salaries and services, which often constitute a material portion of a municipality’s ongoing but necessary expenses.

As the Scranton Times-Tribute has reported, there is no doubt that the devil will be in the details....

In January 2012, AB-506 took effect in California, placing additional restrictions on  municipalities’ ability to file for Chapter 9 protection. {See: Goodwin Procter Client Alert}.   In particular, the Act requires municipalities to negotiate with their creditors, where possible, prior to a Chapter 9 filing. 

AB-506 was developed as a compromise between the interests of unions and pension funds, and the municipalities themselves.  Unions and pension funds wanted heavy restrictions on municipal bankruptcy filings in light of how their contracts may be treated in bankruptcy.  Municipalities, however, are often squeezed between the cost of ongoing obligations and the inability to raise revenue to support those obligations, absent the drastic compromises enforceable in bankruptcy. 

Almost immediately after the passage of AB-506, political pressure began to mount for additional municipal requirements and expansion of the power of mediators prior to any Chapter 9 filing. 

For the moment, it...