What Harrisburg learned while waiting to file for bankruptcy

Last year, muniland watched as the mayor, city council members and state legislature went through a tortuous period of fighting over filing municipal bankruptcy for Harrisburg, Pennsylvania. The city council filed a bankruptcy petition, but the mayor objected. Then the legislature passed a law that denied Harrisburg the right to file until November 30, 2012. The bankruptcy judge threw out the bankruptcy petition and the governor appointed a receiver to take control of the city’s finances.

The first-state appointed receiver, the seasoned bond attorney David Unkovic, worked for about six months and then resigned from his position because he felt he was being obstructed in his efforts. He testified to the state senate about the substantial problems with the city’s debt issuance. Roxbury News captured his testimony about the cronyism and his recommendations to legislators:

The delay that occurred last year gave Unkovic enough time to review the bond offerings that pushed the city into insolvency. Unkovic said in his testimony:

You need a criminal prosecutor to get all the emails [of the bond deals]. There was certainly a disdain for the law. These deals stunk like a kettle of rotten fish.

Joseph N. DiStefano of the Philadelphia Inquirer wrote a piece about Unkovic’s recommendations for changing state laws to protect taxpayers, including banning swaps, when municipal debt is issued:

Mapping the saga of San Bernardino

Reuter’s reporters Tim Reid, Cezary Podkul and Ryan McNeill wrote a great analysis of the fiscal and political troubles of bankrupt San Bernardino, California. They zeroed in on the high cost of wages and pension benefits for fire and police safety workers:

In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.

Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents – most of that on wages and pension costs.

San Bernardino’s coming pension brawl

The bankrupt cities San Bernardino and Stockton, California share similar fiscal woes. Both include very high employee pay and benefits. Both have sought the protection of Chapter 9 municipal bankruptcy and are shielded by the courts from any new litigation. The court protection gives the cities time and fiscal space to negotiate with employees and creditors, and to organize their financial affairs. It’s hard to imagine the difficulty of running a city in bankruptcy with dwindling cash reserves.

Stockton and San Bernardino have taken very different approaches to how they will manage their cash reserves. Each approach will likely have big effects on how their bankruptcy processes play out.

Stockton has chosen not to challenge CalPERS, the statewide pension system, and has continued to pay the monthly pension contribution for its employees. The city’s unwillingness to ask CalPERS to negotiate has caused other Stockton creditors – the bond insurers – to challenge whether the city has met the conditions of a Chapter 9 bankruptcy. The blog Public Sector Inc describes the situation:

What would Atwater gain with bankruptcy?

Atwater, California voted at a special meeting on Wednesday to declare a common-law fiscal emergency. This is the first step toward filing for municipal bankruptcy. It makes Atwater the fourth city in California to publicly declare fiscal distress. The city must now go through a 90-day mediation period with its creditors, public employees, bondholders, trade vendors and CalPERS, the statewide pension provider.

The bankruptcy process is well established, but very little cost benefit analysis has been done to evaluate whether the benefits of bankruptcy outweigh the costs. Vallejo, CA spent $13 million on bankruptcy costs and Jefferson County, Alabama’s  large and very complex Chapter 9 case still has enormous legal costs to contend with. Jefferson County Commission President David Carrington explained what the county faced:

“People look at our side in the courtroom and see five or six lawyers, which seems like a lot,” Carrington said. “It is, but the other side has 45, 46 lawyers over there working against us.”

Should bankrupt California cities disincorporate?

California State Comptroller John Chiang said in a press conference yesterday in San Francisco that he expected more municipal bankruptcies in the Golden State. Bloomberg has the details:

“We will start to see more bankruptcies, not necessarily because of pension issues,” Chiang said. “We need the state to participate in trying to prevent these bankruptcies.”

California cities that have hit their fiscal bottoms have been turning to the Chapter 9 municipal bankruptcy process. Recently, Stockton, Mammoth Lakes and San Bernardino voted to put themselves under the protection of a bankruptcy judge and shield themselves from new legal claims. Bankruptcy is a complex and expensive process. Fitch Ratings said in a recent report (page 5) that the state of California offers no other intervention process for broke cities.

States hold sway over their cities in bankruptcy matters

Bloomberg View’s Josh Barro wrote an interesting piece Thursday urging Scranton, Pennsylvania to declare Chapter 9 bankruptcy. Scranton has achieved national attention after the mayor reduced all city workers’ pay to minimum wage last week because the city could no longer afford paying their full salaries, a powerful image of how little cash Scranton has left.

The problem with Barro’s proposal is that Scranton cannot file for Chapter 9 without the consent of Pennsylvania’s state government. Chapter 9 bankruptcy is a part of the federal bankruptcy code, and it gives individual states the authority to decide whether their cities can go bankrupt:

States play a key role as gatekeepers or guardians in that, by virtue of [bankruptcy code] amendments codified in 1994, they have to specifically authorize their municipalities to file for Chapter 9. Silence on the matter is taken as a prohibition on filing.

Moody’s muniland blacklist

Moody’s this week published a Special Comment (subscription required) that crystallizes a lot of the discussion regarding bankruptcies and defaults that has been going around muniland lately:

Recent decisions to seek bankruptcy protection by two large California cities – Stockton and San Bernardino – provide some indication that willingness to pay debt obligations may be eroding in the US municipal market. Although many municipalities have faced severe fiscal pressures since the start of financial crisis, only a handful of municipalities have chosen not to pay their debt.

Most of these municipalities have defaulted due to exposure to failing enterprises, such as a convention center, sports arena, or other project that was backed by a government until the project and related debt were left to falter. In contrast, Stockton and San Bernardino’s pursuit of bankruptcy are different and potentially more significant given that these defaults emanate not from enterprise risk but instead from stress on core government operations, notably high pension and other compensation costs and debt service.

Stockton wants to end generous healthcare benefits for its retirees

Some residents of Stockton, California are upset over the city’s decision to eliminate free healthcare benefits for public retirees. Michael Fitzgerald, a columnist for the Record, Stockton’s newspaper, wrote last week about the policy change:

The lavish perk that did the most to bankrupt Stockton is free lifetime medical care for some retired city employees and spouses. Now retirees are suing to keep it free.

And a commenter said in response:

You just wrote that retirees are the most responsible for the bankruptcy. The most? Really? Not an arena or a marina that has no fuel for boats or all the money the state raided to continue its programs, or……? About all that is left is retirees. And “unfunded liability.” Who even knew that arcane term before the City Manager started throwing it around, along with his other favorite, the Ponzi Scheme?

Privatize San Bernardino’s EMS services

The City Council of San Bernardino, California, has declared its intent to file for bankruptcy and has issued a fascinating document that outlines the steps it would take to regain fiscal solvency. It’s a very creative and orderly attempt to reshape the finances of the government.

Proposals include a tax on phone service, estimated to raise $6.7 million dollars a year; a comprehensive asset plan to set market-rate rents for some city-owned properties and below-market-rate leases for others to create incentives for development; an increase in fees for false alarms that police respond to; and the outsourcing of tree trimming, street sweeping, graffiti abatement, streetlight maintenance and trash collection.

Although these ideas could raise new revenues, they do not really address the most burdensome parts of San Bernardino’s budget.

Bankruptcy and fudged accounting in San Bernardino

San Bernardino, California made headlines this week for two distressing reasons. First, its city council voted to move toward declaring Chapter 9 municipal bankruptcy. Next, the city’s attorney made the shocking revelation that San Bernardino’s books have been cooked for 13 of the past 16 years, meaning that the surpluses the city had reported were, in fact, deficits.

San Bernardino is the third California city to move toward bankruptcy in the last few weeks, but the issue of bad accounting elevates this bankruptcy to a whole new level. The California Legislature enacted a new law last fall, AB 506, that requires 90 days of mediation between the city and creditors prior to a new municipal bankruptcy filing. But it is hard to see how that will be possible in San Bernardino’s case, since there are no legitimate financial filings to negotiate from. Moreover, the city doesn’t have the ability to pay its bills for 90 days during mediation. We’ve entered the twilight zone of muni workouts here.

Putting aside the issue of the city’s inability to follow proper accounting standards, San Bernardino may have a political leader in its mayor who is willing to take on the public unions and get necessary concessions from police officers, firefighters and other city employees. In the video above, Mayor Pat Morris discusses how the city will need to renegotiate salary and pension deals with city workers. Generally, salaries account for 70 to 80 percent of a local government’s cost structures and matter much more than debt service. Cities in California have the right to break wage and pension contracts with workers in bankruptcy. The problem is that we haven’t seen any political leaders willing to stand up to the unions.

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