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San Bernardino Wins Its Eligibility Fight

The Chapter 9 case of the city of San Bernardino, California will proceed. After a year in limbo and a spirited fight from the California Public Employees' Retirement System (CalPERS), San Bernardino was finally able to win a ruling from Bankruptcy Judge Meredith Jury that it is eligible to be a Chapter 9 debtor. 

San Bernardino filed for Chapter 9 on August 1, 2012, claiming a budget shortfall of $46 million. The eligibility fight centered on San Bernardino's claim that the requirement to negotiate in good faith with its creditors was impractical. CalPERS argued that the city effectively side-stepped its obligation to negotiate by ignoring warnings of its impending financial difficulties. Further, CalPERS insisted that the city waited until its financial predicament became so dire that the circumstances were exigent, thereby manufacturing a situation where negotiations became impractical. 

Despite CalPERS’ arguments, Judge Jury appeared to accept the genuineness of the need for San...

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Can P3s Save the Public Sector?

Detroit’s recent bankruptcy filing, the largest Chapter 9 filing in U.S. history, highlights the potential consequences faced by our nation’s increasingly cash-strapped municipalities. Municipal bankruptcy filings remain relatively rare; approximately 40 governmental bodies (including utility authorities and special districts) have filed for Chapter 9 protection since 2008, which tracks the average of 8 filings per year since 1937. Nevertheless, Detroit’s experience proves that even major cities can quickly succumb to the pressures imposed by dwindling revenues and rising debt.

Given the country’s sluggish recovery from the Great Recession, as well as unrelenting increases in public pension and other long-term municipal debt, many public agencies are revisiting the viability of public-private partnerships, or “P3s,” as a financial salve. Structured correctly, a P3 can help a municipality maximize financing resources, increase return on investment, and expand and modernize services and...

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Detroit’s Bankruptcy Case Gets Murkier With Other Collateral Lawsuits

On July 23, 2013, the Michigan Court of Appeals ordered a temporary halt to three lawsuits that seek to stop Detroit from filing for bankruptcy. The lawsuits were filed by city workers, retirees, and pension funds earlier this month, prior to Detroit’s bankruptcy filing on July 18, 2013

The suits anticipated that, in a bankruptcy, Detroit  would seek to cut retirement benefits. After filing the petition for relief under Chapter 9 of the Bankruptcy Code, Detroit’s emergency manager  requested an extension of the Chapter 9 automatic stay to include a freeze on legal actions such as those filed by the city workers, retirees, and pension funds. This is the first in what will certainly be many interesting events in the case of the nation’s largest city to have filed for Chapter 9. 

On Friday, the Michigan Circuit Court ruled that the state law that allowed Michigan Governor Snyder to approve the bankruptcy filing violated the Michigan Constitution. The Court ordered Kevyn Orr, the...

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Another CA Hospital District on Bed Rest - Moody's is Watching

Moody's Investors Service placed Antelope Valley Healthcare District's Baa3-rated revenue bonds on review for downgrade following the unexpected resignations of its CEO and CFO. The review will last for 90 days.

The Hospital District, which operates a 420 bed hospital, has $134 million in outstanding debt. In May, both the CEO and CFO resigned, for reasons that are unknown. The hospital, which employs 2000 people, is the region's only full-service hospital and the only hospital in the area that provides obstetrical services. 

According to the Bond Buyer, the hospital announced in November 2012 that it won't meet its rate covenant of 1.3 times MADS coverage in fiscal 2013 due to additional expenses to be incurred before the end of the fiscal year. It expects coverage to be above 1.1 times, but coverage below 1.3 times is considered a technical default with the remedy being a requirement that a consultant be engaged.

Antelope Valley Healthcare District is the next in a trend of hospital...

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CalPERS Seeks to Disqualify Counsel for National Public Finance Guarantee

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.

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California Public Policy Center Estimates CA Debt in Excess of $1.1 Trillion

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...

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Stockton Bankruptcy Portends Pension Debate

In April, the city of Stockton, California, became the largest U.S. city to become eligible for Chapter 9 bankruptcy relief. U.S. Bankruptcy Judge Christopher Klein, to whom the bankruptcy case was assigned, reasoned that, due to its current financial situation, the city required “the muscle of the contract-impairing power of federal bankruptcy law” to continue providing its citizens with basic services.

Stockton will now prepare and present a restructuring plan to reorganize more than $1 billion in debt, which includes approximately $900 million in public pension obligations owed to the California Public Employee’s Retirement System (CalPERS). Despite the city’s prior representations regarding its intention to repay those pension obligations in full, many observers suspect that the city will seek a reduction of its CalPERS’ debt. If approved, such a move would represent the first reduction in public pension obligations in the nation obtained through Chapter 9 proceedings – a precedent...

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Stockton Reaches Settlement with Ambac on $13.3 million of City Debt

The city of Stockton recently received bankruptcy court approval to enter into a settlement agreement with Wells Fargo and Ambac Assurance Corp. restructuring over $13.3 million of city debt.  The deal, reached as a result of confidential mediation, relates to specific securities issued by the city in connection with redevelopment efforts in 2003.  The city-issued securities are backed by lease payments covering Stockton’s main downtown police facilities, a library and three fire stations.  Wells Fargo acts as the certificate trustee, while Ambac is the certificate insurer.       

The settlement agreement will provide Stockton with much-needed additional liquidity by allowing it to tap into a reserve fund established as part of the original certificate issuance.  Reserve fund monies will be used to pay principal and interest on the debt for fiscal year 2013.  In fiscal year 2014, the city’s general fund obligations will be reduced by approximately 70%.  The city will also benefit from...

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San Bernardino Says OK to CalPERS in New Budget

In a decision not likely to sit well with bondholders and other creditors, the city of San Bernardino has decided to resume payments to the California Public Employees’ Retirement System (CalPERS) but to no other creditors. CalPERS, which is the city’s largest creditor, is owed more than $12 million on account of missed pension fund contributions. Going forward, the city will make the required bi-weekly $1.2 million payments, which will have no impact on the arrears owed CalPERS.

While the bankruptcy judge presiding over the city of Stockton’s bankruptcy case recently green-lit its Chapter 9 petition, San Bernardino’s petition remains up in the air. Indeed, a timeline for a final decision on the Chapter 9 petition remains unclear. Also unclear is what effect, if any, resuming payments to CalPERS will have on CalPERS’ objection to San Bernardino’s Chapter 9 petition. CalPERS had objected to San Bernardino’s Chapter 9 petition early on, yet did not object to Stockton’s Chapter 9 petition....

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Will The Next Wave of Chapter 9 Filings Be From Public Hospitals?

The focus over the past several months has been on municipal bankruptcies. The press has covered San Bernardino, Stockton, Detroit and others. Yet, there may be a whole new wave of bankruptcy filings approaching.

Starting with Mendocino Coast District Hospital, which filed Chapter 9, we may be seeing a new trend: public hospitals resorting to bankruptcy for their financial woes. But, can Chapter 9 of the Bankruptcy Code be applied to public hospitals?

The first requirement in a Chapter 9 bankruptcy is that the debtor must be a “municipality.” The Bankruptcy Codedefines municipality as a “political subdivision or public agency or instrumentality of the [s]tate.”  The Bankruptcy Code does not define “political subdivision,” “public agency” or “instrumentality of the [s]tate.” Nonetheless, the legislative history of Chapter 9 shows that Congress intended these terms to be interpreted broadly. Cities, counties, townships, and the like generally fall under the rubric of “political...

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Section 903 – In Chapter 9 Does Federal Law Trump State Law or Vice Versa?

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...

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Lessons for Bondholders

With Stockton now squarely within the parameters of Chapter 9 and Detroit continually troubled but hoping to avoid Chapter 9, are there any synergies or similarities between the two to serve as a warning for bondholders who will likely end up bearing some (and possibly all) of the losses in the restructuring of these municipalities?  Perhaps. 

There are certainly factors to examine in determining if and when a municipality will be able (or unable) to meet its obligations.

In Detroit, one of the key indicators that the city was in trouble was the number of people who have left the city and the socio-economic status of those who remain, which in many instances are simply the ones who can’t afford to leave. This translated into a decreasing tax base at a time when the same amount (or more) of municipal services (police, fire, etc) were still needed because the geographic area remained the same. 

In California, the issue is not population drain, but unsustainable municipal expenses due...

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War on CalPERS?

With much of the focus in recent months on the bankruptcy filings of San Bernardino and Stockton, and the active stance that California Public Employees' Pension Fund (CalPERS) is taking in those cases, the small town of Pacific Grove is taking steps to keep CalPERS in check. Recent reports indicate that Pacific Grove is going on the offensive. Recognizing that its pension liabilities are at unsustainable levels, Pacific Grove is questioning how CalPERS computes its municipal liability. 

Understanding and questioning the computation will be the first step in negotiating a resolution. The city claims it cannot afford to terminate the pensions, but it will no doubt be keeping a close eye on the Stockton bankruptcy to see if it can exert any additional pressure. Absent a negotiated resolution for Stockton, the Bankruptcy Court will need to address whether the federal bankruptcy laws and the Constitution prohibit a state from granting special protections to pension funds and other...

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Stockton Can Stay in Bankruptcy

The bankruptcy court overseeing the Stockton, California bankruptcy case has finally settled a much-watched dispute over whether the city was an eligible debtor under Chapter 9 of the Bankruptcy Code. On April 1, 2013, Judge Christopher Klein of the United States Bankruptcy Court for the Eastern District of California issued a bench ruling finding that Stockton is an eligible debtor and, therefore, entitled to remain in bankruptcy. 

The objecting creditors, which included Stockton’s bond insurers, had argued that the city failed the “good faith” requirement for Chapter 9 eligibility imposed by both California statute and the Bankruptcy Code. The creditors’ main point of contention was the city’s failure to negotiate or seek any concessions from the California Public Employees’ Retirement System (“CalPERS”) as part of the city’s pre-filing creditor negotiations. Rather than engage its largest creditor, the objecting creditors argued that the city instead sought disproportionate...

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Budget Realities: Pension and OPEB Liabilities Facing Municipalities

This guest post was contributed by J. Robert Medlin, a Senior Managing Director and Southwest regional leader in FTI’s Corporate Finance (“CF”) practice, resident in Dallas. 

Two of the largest issues facing municipalities today are underfunded pensions and unfunded “other” post-employment obligations (“OPEB “). Historically, deficiencies in public accounting rules have allowed these obligations to be obscured from view, but change is being phased in through the introduction of new GASB standards that require municipalities to disclose the full impact of pension and OPEB liabilities and expenses.

In addition to accounting disclosure deficiencies, the legacy benefit funding problem has been exacerbated by:

  • Aggressive return rate assumptions that are significantly above actual median returns for the last five years;
  • Public officials that are pressured to grant benefits due to the collective bargaining rights of public servants;
  • Macroeconomic pressures and local stagnation;
  • Actuaries complicit...
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Goodwin Procter Partner Deborah Schrier-Rape to Moderate Panel on Municipal Insolvency Issues at 21st Annual ABI Bankruptcy Battleground West Los Angeles on March 22

On March 22, Goodwin Procter partner and MuniBK editor Deborah Schrier-Rape will participate in the 21st Annual American Bankruptcy Institute conference entitled, “Bankruptcy Battleground West Los Angeles.” This year the conference will be held at the Hyatt Regency Century Plaza in Los Angeles, California.

Deborah will act as moderator for the panel entitled, “Boom & Bust: California Cities.” The panelists will include: Hon. Christopher M. Klein, U.S. Bankruptcy Court (E.D.Cal.); J. Robert Medlin of FTI Consulting, Inc.; Karol K. Denniston of Schiff Hardin LLP; and Jeffry A. Davis of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC.

The panelists will discuss pending Chapter 9 cases involving a number of California cities including Stockton, San Bernardino, and Mammoth Lakes. In addition, they will discuss matters particular to municipalities in California including:

  • the requirements of AB 506 and its gate-keeper function;
     
  • the structure and enforcement of municipal bonds in...
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Sequestration on the Local Level

Sequestration went into effect on Friday, March 1st, and thus far the reaction has been mixed. By Tuesday, the market was at an all-time high, suggesting that sequestration is not the major issue many projected. It is still early, however, with  the longer term effects still to come. 

The Pentagon says it will be forced to furlough about 15,000 military school teachers and staff around the world due to the automatic budget cuts that took effect last Friday. On a local level, each state is affected.  The White House published a state-by-state analysis that outlines the potential impact to each state as a result of the sequestration. The reports can be found here.   

When it comes to municipal bankruptcy, sequestration is a significant outside force that will add to the revenue losses hitting localities across the nation. Professor Kleinbard of USC School of Law wrote an interesting presentation called Why Tax Revenues Matter? that sets forth the case for keeping folks employed and...

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MuniBK News Roundup

Trial Date Set for Stockton Eligibility

After months of legal wrangling, the legal issues surrounding whether Stockton is eligible to file for Chapter 9 protection will come to a head in a four-day trial beginning on March 25. The trial essentially pits the interests of CalPERS, which contends it is entitled to continue to receive full payment under California law against certain bondholders and bond insurers, who contend that CalPERS’ claim should be treated as an unsecured claim and, therefore, receive the same treatment as the bondholders. 

While the similarity of the claims of creditors should be an issue reserved for confirmation of any plan of adjustment, the creditors seem poised to try to make it a central issue to Stockton’s eligibility to be a Chapter 9 debtor, as Stockton  is required to prove it has satisfied the state and federal hurdles to a Chapter 9 filing. Absent a last minute settlement, the outcome of the trial, which presiding Judge Christopher Klein has promised will...

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The Fall Out From Sequestration - The Potential Municipal Impact?

Cities and counties across the nation are bracing for the austerity measures that sequestration will require as of Friday. The automatic budget cuts to occur will have an immediate effect on education, defense and transportation.

Certain cities, such as San Diego, California and Norfolk, Virginia will be disproportionately impacted as a result of their high concentration of defense spending and the attendant jobs that will be eliminated due to the loss of funding. 

Other significant impacts will include furlough of meat inspection workers, causing a potential slow-down of meat and poultry plants, furloughs of screeners at airport checkpoints, and layoffs of teacher’s aides in public schools. 

Lost jobs and lost wages will also have a direct effect on municipal coffers as a reduction in consumer spending concurrently reduces the sales tax revenue that would have been generated. Further, municipalities may very well have to step up and fund programs out of their already tight coffers. 

All...

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San Bernardino and CalPERS Continue Battle Over City’s Debtor Eligibility

The city of San Bernardino filed its voluntary petition for relief under Chapter 9 of the Bankruptcy Code on August 1, 2012. Six months later, the city and the California Public Employees’ Retirement System (“CalPERS”) continue to be  at odds. 

Prior to the status conference scheduled for February 12, 2013, CalPERS filed a report contending that the city’s condition had “deteriorated” since the December status conference held at the Bankruptcy Court. CalPERS argued that there has been a “mass exodus” of key personnel that “were critical to the city’s restructuring efforts and instrumental in developing and maintaining the city’s relationship with CalPERS and other key creditor constituencies.”  In addition, CalPERS accused the city of not being “transparent” in its dealings with creditors. 

In its response, the city of San Bernardino refuted CalPERS’ accusations and advised the Bankruptcy Court that the CalPERS’ report, which relied on blogs and other media reports to support its...

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