MuniLand

“Who benefits from all this tap-dancing? Who’s interest is the Commonwealth promoting? Not the public, not the city of Harrisburg. They are promoting the interests of the bond insurers.”

That is a quote from Mark D. Schwartz, the attorney for the city of Harrisburg, Pennsylvania who filed for Chapter 9 bankruptcy on October 11. Harrisburg is the center of a multi-year, multi-player fiasco over an enormous, under-utilized waste incinerator. The city stopped making payments ages ago on the incinerator bonds and is past due on about $85 million of principal and interest.

The missed payments were made up by the county and a bond insurer, Assured Guaranty, both of whom have sued the city. The city filed for bankruptcy, in part, to halt that litigation and work out their debts in an orderly process under the purview of a federal bankruptcy judge. It’s a creditor scrum and further complicated by efforts from some in the state legislature to take over the city and put it in receivership.

The hard facts of the story are these:

Current city officials did not create the problem, but are simply attempting to clean-up a long festering mess. The mayor refuses to support the bankruptcy and uses the city website to promote her views. The city’s lawyer appears to have met the federal court’s requirements for filing a Chapter 9 bankruptcy case. There is a lot of disagreement in the municipal bond market about the lawfulness of the Chapter 9 filing. The city is currently being sued by six parties for non-payment on guaranteed bonds. The first bonds for the incinerator were issued in 1998 for $33M. The city guaranteed $242 million of incinerator debt/loans. State Sen. Jeffrey Piccola, who represents the county, is trying to get the state to take over the city. His attempts are being delayed. The city had a $72 million operating budget in 2010 and paid $27M of that in debt service. The city is clearly insolvent.

Meanwhile whoever writes the “Lex” column at the Financial Times seems to have had drinks with a representative of the bond insurer, Assured Guaranty, and gives a few lashes to city officials. Lex says:

But the [Harrisburg city] council’s refusal to sufficiently raise taxes or accept offers for assets, including the incinerator itself, has put its bond insurer Assured Guaranty in a ticklish spot. It is covering payments on the bonds, for which it received a tiny fee for insuring, even as it sues the town to force revenue increases. Any shortfall in revenue from the incinerator was in part a general obligation of the city.

@tednesi Ted Nesi  The Dow is down 4% as I write this. But I’m sure the market will turn around once Central Falls releases its Ch9 plan at 3.

Central Falls, Rhode Island is a down on the heel community that has become the epicenter of the battle to preference municipal bondholders  over retired municipal workers in bankruptcy proceedings. This is a tale of the state of Rhode Island turning federal bankruptcy law and pension law upside down.

When an entity becomes insolvent and seeks the protection of a bankruptcy court it throws itself within the processes and rules of the federal bankruptcy court. Cities are not liquidated in a Chapter 9 bankruptcy but outstanding claims against a community are reduced so that the community can pay them all. Traditionally in bankruptcy proceedings pensions are treated similarly to bondholders and other secured creditors.

Incredible shrinking workforces

I’ve read in a few places that state and local governments were reducing the number of full-time employees and hiring more part-time workers. There is a story in the Dayton Daily News that nicely details the trend:

The data show that both the state and local Ohio governments attempted to get the work done by hiring more part-time employees. While local governments shed a little more than 11,000 full-time employees, they added almost 6,000 part-timers, a 4.6 percent increase. The state, meanwhile chopped close to 1,400 full-time workers and added 386 part-timers, a half-percent increase, according to Census data.

Ohio’s government job-shedding put it in the top third of the 50 states, although margins of error from the Census survey data make exact rankings impossible.

Municipal bond ownership has remained relatively steady over the past year, according to the Federal Reserve’s latest Flow of Funds data, which was released yesterday (Fed’s L.211 Municipal Securities and Loans page 92). The data paints a different picture than the one we typically hear from the media of large outflows from retail investors and mutual funds following Meredith Whitney’s prediction of massive municipal defaults. Essentially the whole municipal bond market has increased slightly in size, growing from $2.842 trillion in 2Q 2010 to $2.886 trillion in 2Q 2011. Ownership for all categories has remained pretty steady.

The puzzling part is that the Federal Reserve continues to maintain that muniland is about $2.8 trillion in size. Back in June my colleguage Daniel Berger of Thomson Reuters Municipal Market Data kicked up a dust storm when he began to question the overall size of the municipal bond market. George Friedlander of Citigroup got on the story too and wrote the following:

After considerable conversation with Federal Reserve staff and recalculation based upon separate sources, we have concluded that the Fed’s data dramatically understates the amount of outstanding municipals. We now estimate that there is a sum total of roughly $3.7 trillion in state and local debt outstanding, in comparison with the $2.925 trillion reported by the Fed for year-end 2010. While the Fed may modify its data at some point, we felt that it was important to present this modified picture of the size and mix of holdings on a timely basis.

One of America’s oldest institutions is facing default. The United States Post Office could be forced to stop delivering mail at the end of September. The rhetoric around the issue is beginning to sound like the potential default of U.S. government debt obligations during the debt ceiling debate. A report from the Government Accountability Office (GAO) tells the fiscal tale:

USPS has experienced a cumulative net loss of nearly $20 billion over the last 5 fiscal years. USPS does not now have—nor does it expect to have—sufficient revenue to cover its costs without legislative changes.

Every nation on earth has a postal service. Some countries have combined mail and phone services, although many have been privatized in recent decades. In Japan the post office is combined with the world’s largest deposit bank and mail carriers serve as bank tellers as they do their delivery rounds. Postal service is indispensable to an economy and society.

Bankruptcy for Harrisburg finally?

The fiscal troubles plaguing Harrisburg, Pennsylvania have been well telegraphed in muniland. Reuters detailed the problems earlier this month:

Pennsylvania’s state capital, a city of 50,000 about 100 miles west of Philadelphia, has been flirting with bankruptcy as it struggles to pay off $300 million in debt incurred through a financing scheme used to fund a revamp of its trash-burning plant.

In July, the city council rejected a rescue plan put forward by a state-appointed advisor that called on the city to sell the incinerator, renegotiate labor deals, cut jobs, and sell or lease its parking garage.

The Daily Show – What Are You Friggin’ Nuts Over There?

S&P replaces president after U.S. downgrade

The board of directors of McGraw-Hill met Monday and voted to oust Deven Sharma as president of their Standard & Poor’s rating division. This forced resignation comes approximately three weeks after S&P downgraded the debt of the United States. Jon Stewart, in the clip above, jokes about political pressure brought to bear on the company by the U.S. government. I think he is spot on with his humor.

Last week the U.S. Department of Justice just happened to discuss publicly an investigation of S&P and the other major raters about ratings assigned before the financial crisis to mortgage-backed securities, even though this investigation has been ongoing since 2009. Why the sudden need to reiterate this publicly? S&P’s downgrade was a brave action. It’s a pity that Deven Sharma has to pay for it with his job. As I wrote previously:

Standard & Poor’s took one of the bravest actions that I’ve ever seen a rater take when it downgraded the United States one notch. Furthermore, this marks a new beginning for accurate credit analysis and truth in fixed-income markets. Keep speaking the truth, S&P.

The Jefferson County Commission met last Friday to decide if they would accept a proposed settlement from creditors led by JP Morgan on their $3 billion of sewer debt. After many hours of meeting in executive session and in public, the Commission voted to reject the proposal, remove the court appointed receiver and directly negotiate with the creditors.

I watched the live webcast of the meeting and it was actually one of the most open and informed county commission meetings that I’ve ever seen. I give the Commissioners a lot of credit for their efforts to clean up a problem which they did not create. In the meeting there was a lot of indignation against JP Morgan and their role in burdening the county with several billion dollars of derivatives. Several Commissioners felt especially that there had been fraud in these transactions and were not willing to release their right to sue JP Morgan and other banks for these problems. There were also calls for increased transparency in the process. There was a lot of drama in the meeting.

The drama was only heightened when county commissioner, T. Joe Knight, saw a message on his mobile device in the middle of the meeting that said the Wall Street Journal was running a headline announcing that an agreement had been reached. You can see the video of Commissioner Knight above shouting, “We don’t have a deal”. When I clicked over to the WSJ.com the paper was running a story that quoted the state finance director and said that the Commission had accepted the proposal although the Commission had not yet voted. The Wall Street Journal eventually yanked the false story and replaced it with this account which makes their error seem less odious:

“The unions are buying power”

This is a great video of Stephanie Gomes discussing her experience as a member of the City Council in Vallejo, California, as they struggled through a municipal insolvency and bankruptcy. She talks about the power of the police and firefighter unions and their stranglehold on local politics. Gomes comes across as passionate citizen who was willing to confront some of the deep-seated problems in her community. She highlights the importance of local and national media attention on the “dirty laundry” of municipal finances like high salaries and generous pensions for union workers. Her experience is an important lesson for anyone interested in muniland.

Video via Vallejo Independent Bulletin and WPRI.com.

Jefferson County nearly files bankruptcy but instead ditches negotiator

The Birmingham News ran this above video of Jefferson County Commission President David Carrington discussing the commission’s meeting on Friday when they voted to delay filing Chapter 9 bankruptcy, cut out their court appointed receiver and deal directly with bond creditors. From what President Carrington says, it sounds like they almost filed bankruptcy at the meeting::

I thought we were going Chapter 9. I think I could take a test on Chapter 9 I know it so well.

The Jefferson County Commission is meeting now to review a counter-proposals from creditors lead by JP Morgan and decide whether to accept it or file for Chapter 9 bankruptcy. Live feed via the Birmingham News.

To recap, Jefferson County, Alabama is getting a lot of attention as it negotiates with the holders of $3 billion of sewer bonds. The county would like to pay $2 billion to settle the $3 billion of bonds outstanding and limit the rate increases county residents would have to pay. This arrangement would pay bondholders (led by JP Morgan) 66 cents on the dollar — not a great recovery but not outrageous either. Bondholders want the state to guarantee this new arrangement and stand ready to pay in the event of another default.

Update on creditor offer terms (August 12, 2011) via the Birmingham News:

THE CREDITORS’ NEW PLAN

> Refinance a principal amount of $2.326 billion, with $233 million going into a debt service reserve, $23.3 million paying issuance costs and $2.07 billion to redeem all outstanding sewer warrants based on negotiated concessions.