Detroit: At Least as Bad as Expected

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...


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...


CREW Los Angeles Panel Recap

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...


S&P Report: No Trend Seen in Recent California Bankruptcies

Standard & Poor’s (“S&P”) released a report in January 2013 stating that the Chapter 9 bankruptcy filings by the California cities of Stockton, Mammoth Lakes, and San Bernardino in 2012 do not represent a trend. Rather, S&P believes that each bankruptcy resulted from faulty decisions at the individual city level.

Although S&P still expects the credit quality of several California cities to decline in 2013, the agency also believes that a greater number of cities will enjoy improved credit ratings. According to the report, “[d]espite the trio of bankruptcy protection filings in the state last year, most California cities absorbed the impact of the Great Recession and preserved their credit quality.” The report added, “[w]e believe the small number of municipal bankruptcies is a testimony to the resilience of local governments and their ability and willingness to scale back expenditures and align them with lower revenues.”

The report contradicts recent predictions by market...


The State of the States (Well, at Least Four of Them)

Harvard's Institute of Politics, the University of Pennsylvania's Fels Institute of Government and the American Education Foundation have joined forces to issue a “pilot” report on the financial status of four states: Massachusetts, New Jersey, New York and Pennsylvania. The report, which the authors hope to repeat annually (and to ultimately add other states), compiles information from the Comprehensive Annual Financial Reports, which are published by the Comptroller of each state.

Not surprisingly, the report paints a grim picture, estimating that states owe a total of $4.5 trillion in debt, comprised of $2.9 trillion in unfunded pension fund debt, $627 billion in unfunded health  care benefits, and $1 trillion in state borrowing (including general obligation bonds, special obligation bonds, notes payable, etc.).

Even more troubling is that states have, for years, underestimated the cost of these programs notwithstanding the market dips that have plagued the economy during the...


City Fiscal Conditions Report 2012: More of the Same

A recent report by the National League of Cities highlights the fact that while cities are responding to declining revenue and have implemented some budget cuts and creative solutions to fill budgetary gaps, their fiscal condition still reflects the prolonged economic impact of the Great Recession. 

Many cities continue to face:

• Projected revenue declines for the sixth consecutive year
• Continued use of reserve funds without replenishment
• Declining tax bases
• Increasing pension demands
• Increasing demands for social services and programs 

A link to the full report detailing the findings can be found here.



Pensions: The Widening Gap

Much ink has been spilled by MuniBK and other forums reporting on the pension financing issues facing our cities. The Pew Center on the States recently issued a report on the widening pension gap. 

According to the report, states face a $1.38 trillion gap between their assets and their pension obligations for public sector retirement benefits as of FY 2010 (including both pension and retiree healthcare benefits).  Connecticut, Illinois, Kentucky and Rhode Island were among the worst states (under 55% funded).  A state by state analysis can be found here.

Not surprisingly, much of the gap was created by investment losses during the Great Recession.  Most plans had projected annual gains of 8%.  During the Great Recession, however,  the median loss was actually 25%. The “rebound” that the market has achieved in the years since has not made up for these losses. 


The Municipal Sandwich

A recent report issued by The Pew Charitable Trusts American Cities Project describes how the Great Recession has sandwiched municipalities between an increased demand for services and an inability to raise the revenue required to meet the cost of current services or legacy obligations.

This problem is widespread and comes at a time when state aid to local governments has also declined. According to the report:

  • State aid to local governments fell by $12.6 billion in FY 2010, with additional cuts in 2011 and 2012.
  • Simultaneously, local governments lost $11.9 billion in property tax revenue in FY 2010.

The stark reality faced by municipalities is that services must be cut and legacy obligations reined in.  Privatization of services, regional partnerships, layoffs and budget cuts appear to be the only way that municipalities can begin to operate in the black.   

While municipal defaults and bankruptcies remain rare, bankruptcy, or the threat of bankruptcy, will continue to be a useful tool...


State Budget Crisis Report: The Perfect Storm Heads Toward Municipalities

The State Budget Crisis Task Force has issued a report that highlights many of the issues that are placing increasing financial pressure on municipalities.

The report outlines the forces that have converged to limit state revenue at the same time that states are facing an increased demand for social services and escalating costs.

Decreased sales and income tax revenues, cuts in federal funding to states, increasing Medicaid enrollment and costs, underfunded pension and health benefit obligations and overdue investment in education and infrastructure have combined to elevate state budgetary concerns to crisis levels.

The report details how states have been unwilling to take steps to combat (or even admit) the structural nature of their budget challenges using accounting tricks, one-time revenue raisers, spending cuts and deferred payment of mandatory spending commitments to delay the inevitable financial reckoning.

The pressure on state budgets eventually (and inevitably) trickles down to...


SEC Report Details Areas of Concern in the Municipal Securities Market

The Securities and Exchange Commission recently released a report on the municipal securities market. Based on public field hearings, communications with market participants, academic studies, and public comments, the report identified two primary areas of concern within this market: disclosure and market structure. Both issues may be potentially important to investors concerned about the risk of municipal defaults.

Disclosure is a major concern of market participants, especially in the context of primary offerings involving smaller, less sophisticated municipal issuers and borrowers. The report also underlines the need to ensure that secondary market disclosures are both timely and complete.  In response to this widespread disclosure anxiety, the SEC is recommending a combination of legislative and regulatory changes.

The report also identifies other problems with the fundamental structure of the municipal securities market. It is clear that a vast majority of the municipal market...


Are Pension Wars Coming in CA Municipal Bankruptcies?

On September 12, 2012, CalPERS’ general counsel released a public statement setting forth CalPERS’ legal position on the limitations of the power of the bankruptcy courts to interfere with the relationship between the state of California and its municipalities regarding the payment of retirement and other benefits to state employees. 

Pensions and other benefits remain at the forefront of the municipal financial crisis in California, and it appears that CalPERS may be setting the stage for forthcoming legal battles in the Stockton case, and perhaps others. CalPERS has previously proudly boasted that Vallejo did not take CalPERS on with respect to pension benefits, but only healthcare retiree benefits.   

For months, commentators have predicted a looming constitutional battle over pension benefits. The acuteness of the pension crisis was made plain in a Stanford Institute for Economic Policy Research Report, published earlier this year, which concluded that aggregate pension costs have...