MuniLand

Mammoth Lakes needs to do a Half Moon Bay

Mammoth Lakes, a popular northern California ski town, has filed for Chapter 9 bankruptcy after mediation talks failed with its largest creditor, a developer who was awarded a $30 million settlement against the town in April 2008. The settlement has since ballooned to $43 million, including lawyer fees. Lawyers for the creditor, Mammoth Lakes Land Acquisition, say that the town is solvent and is just using the bankruptcy court to hide from the judgment they owe the company. Reuters’ Jim Christie reports:

Lawyer Dan Brockett said the town invited Mammoth Lakes Land Acquisition to enter into mediation only to follow the law until it could move forward with a bankruptcy filing.

“The mediation in our view was something they would do to check a box,” Brockett told Reuters, adding that his client will contest the town’s eligibility for bankruptcy.

“We’re going to fight this,” Brockett said. “This whole idea we forced them into bankruptcy is nonsense.”

Brockett said the town snubbed a plan by his client that would allow it to pay off the judgment over 30 years.

Stockton hits the wall

The City Council of Stockton, California voted this week to adopt a “pendency budget” in preparation for filing for Chapter 9 bankruptcy, which will place the city under the protection of the bankruptcy court and stay all legal actions against it. This maneuver gives the city some breathing room to come to an agreement with its creditors, especially bondholders and retirees, over how to reduce what the city owes them. This comes after months of Stockton being under a state-imposed “mediation period” in which these kinds of negotiations were voluntary.

Reuters’ Jim Christie reports on the background of the story:

Stockton’s city council voted six to one in favor of the 2012-2013 budget after a contentious five-hour meeting where angry retired city workers pressed council members to reject the $155 million spending plan. It proposes eliminating retirees’ medical benefits to help fill a $26 million budget deficit…

Conservative ideologues aren’t bankrupting Rhode Island

In his New York Times column yesterday, Joe Nocera laid the blame for the fiscal catastrophe in Woonsocket, Rhode Island on Jon Brien, a state legislator who blocked a bill that would have plugged a massive hole in the town’s budget by raising property taxes on its residents by 13.8 percent. Nocera argued that Brien took these actions to shrink the local government because he’s a conservative ideologue, further highlighted by the fact that Brien is also on the national board of ALEC, an advocacy group that pushes for smaller government.

Maybe it’s true that Brien was primarily motivated by ideology, but if Nocera had taken even a cursory glance at the financial statement for Woonsocket, he would see Brien’s position has some merit. Spending on retiree benefits and municipal debt are drowning Woonsocket. The city is in a death spiral.

Let’s start with what Nocera got right: Municipal pensions, the traditional whipping boys for conservative critics of out-of-control government spending, are not Woonsocket’s big problem. The town’s pensions are actually 60 percent-to-90 percent funded, pretty good by Rhode Island standards (page 77). Maintenance of the pension funds required a contribution of only 2.2 percent of the 2011 budget.

The parking lots around Yankee Stadium still stink

Last June I wrote about a bizarre, unrated municipal bond deal that was issued to finance some new parking garages at Yankee Stadium. Because very few people were using the parking facilities, it looked like the $237 million of tax-exempt bonds would soon default. Now the law firm of the former mayor of New York, Rudy Giuliani, has been hired to strike a deal between Bronx Parking Development Co, the parking garages’ operating entity consisting of a husband-and-wife team based in upstate New York, and the bondholders. From the Daily News:

Former Mayor Rudy Giuliani’s law firm has been hired by a group of private bondholders to restructure $237 million in tax-exempt financing for the nearly bankrupt owner of the Yankee Stadium parking system.

The surprise choice of Giuliani’s firm, Bracewell & Giuliani, is part of an agreement reached last week between Bronx Parking Development Co, owner of the 9,000-space garage and lot system, and its creditors.

A municipal bankruptcy does not ruin a state

Chart source: Bonddesk

State politicians in Alabama, Pennsylvania and Rhode Island have lambasted municipalities within their borders that have either declared, or attempted to declare, bankruptcy. The politicians gripe that when a municipality in their state goes into Chapter 9 bankruptcy, it affects the cost of borrowing for the state and other issuers located there. But this rests on the false assumption that markets do not discriminate between different borrowers. Municipal bond issuers, like public companies, are looked at individually because every entity has its own story. After all, when American Airlines went bankrupt, it was not as if all airlines suffered.

Alabama Governor Robert Bentley explicitly used the increased cost of borrowing for other Alabama towns as a bludgeon against Jefferson County officials who declared bankruptcy last November. The Birmingham News wrote:

He [Governor Robert Bentley] said the county’s situation already has affected borrowing throughout the state and he expects the bankruptcy to increase the cost of borrowing even more. “The credit rating of Jefferson County is terrible already so it can’t get much worse, but certainly filing bankruptcy does not help,” he said. “I know they were frustrated but at some point, you have to step up and have to be a leader and have to be a statesman and you have to do what’s right. Bankruptcy is not right.”

Can revenue bondholders relax now?

Bond markets generally focus on who has rights to specific cash flows and control over assets. That was what Alabama federal bankruptcy court Judge Thomas Bennett was addressing when he issued an opinion Friday afternoon covering the insolvent Jefferson County sewer system.

To recap the situation in Jefferson County, re-read what I wrote in November:

Last year, amid the county’s fiscal and political meltdown, the Russell County Circuit Court appointed a water system professional, John Young, to take over the management and operation of the sewer system. This action came at the request of the bond indenture trustee, the Bank of New York, which wanted the bond payments protected. Now the county is fighting with the receiver and creditors for control of the sewer system in bankruptcy court.

The crux of Judge Bennett’s ruling related to whether the sewer receiver, John Young, could keep control of Jefferson County’s most important asset, the sewer system, while the county was trying to consolidate its assets in the bankruptcy process. Bank of New York and other bondholders argued that the federal bankruptcy proceeding could not trump judicial actions taken at the local level. In other words BoNY, representing bondholders, wanted to keep the control of the sewer system and its cash flows. Although revenue bondholders have a lien, or right, to the cash flows of the sewer system, they also wanted control of the asset.

How Jefferson County trips up national reporters

The New York Times really needs to improve the quality of its reporting on the municipal bond market. Mary Williams Walsh makes such a terrible hash of the situation in Jefferson County, Alabama, that she is bound to set off another muniland hysteria in the mold of Meredith Whitney.

In the opening paragraphs, Walsh contends that general obligation bonds (GO) issued by state and local governments and with the pledge of their “full faith and credit” may not be as creditworthy as always assumed. About half of the $3.7 trillion municipal bond market is general obligation bonds. She dramatically states that investors who own GO bonds might be in for a “surprise:”

People who own what is considered the safest type of municipal bond may be in for a surprise.

Lessons from MF Global

The October bankruptcy of MF Global has been the subject of several Congressional hearings recently. 38,000 MF Global clients lost $1.2 billion in the collapse, and numerous regulators, as well as the Department of Justice, have been trying to unravel hundreds of thousands of transactions to discover how this client money disappeared. Weeks later, it’s still unknown whether clients will have their funds returned or whether any laws were broken. What is certain, though, is that even after the passage of Dodd-Frank, our regulatory system has large supervisory gaps.

The derivatives and futures businesses in which MF Global operated are complex, and it’s easiest to understand the firm as a large transaction processor that served its futures clients by connecting them to exchanges around the world. MF Global was both a broker-dealer and a futures commission merchant, meaning it was regulated by the SEC as well as the CFTC. In addition, MF Global was overseen by the Financial Industry Regulatory Authority (FINRA) and the CME, two self-regulatory organizations empowered by the SEC.

The big problem with oversight of MF Global within the U.S. is that there were too many regulators with only a small window into the firm’s activities and none with the ability to see the full scope of risks and capital of the holding company. How can we fix this?

The cost of kleptocracy

Gary White, a former official of Jefferson County, Alabama, had his conviction on conspiracy and bribery charges affirmed by the U.S. 11th Circuit Court of Appeals today. White, a former county commissioner, is already serving a ten-year term in a South Carolina federal prison for his involvement in the sewer scandal that ended in the largest municipal bankruptcy ever. He’s just another piece of detritus from one of the largest cases of municipal corruption in recent American history. The Birmingham News reported the courts decision:

The opinion issued by the court, however, begins with stinging criticism of a period of corruption that included White and other Jefferson County commissioners.

“‘Kleptocracy’ is a term used to describe “[a] government characterized by rampant greed and corruption,” the court’s opinion began, citing three dictionaries. ”To that definition dictionaries might add, as a helpful illustration: “See, for example, Alabama’s Jefferson County Commission in the period from 1998 to 2008.”

Harrisburg back to square one

Federal bankruptcy judge Mary France dismissed the Harrisburg City Council’s petition to file municipal bankruptcy last Thursday. According to Bloomberg her ruling stated:

“For Chapter 9 bankruptcy to work, all of the branches of the municipality must be on the same page,” France said. “Therefore I find that city council was not authorized to file the petition.”

Judge France has hit the nail on the head. The legislative and executive branches of Harrisburg’s government have been behaving like two sides of a family fighting over a deceased parent’s estate. The battle has been brutal and family members have talked past each other. Harrisburg mayor Linda Thompson seems to have little patience for others’ views, which is a tough way to govern.

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