MuniLand

Harrisburg needs the bankruptcy option

Pennsylvania Governor Tom Corbett took the next step in the process of pushing the bankrupt capital of his state towards fiscal recovery today. Bloomberg reports:

David Unkovic, chief lawyer for the Pennsylvania Community and Economic Development Department, is set to run the finances of Harrisburg after Governor Tom Corbett nominated him as the state’s first municipal receiver.

Once approved by a state court, the overseer may act without the consent of the bankrupt capital city’s elected officials. Unkovic’s appointment may be reviewed as soon as Nov. 28.

Unkovic has 30 plus years of experience as a bond counsel. The governor has also hired a Washington law firm to assist Unkovic on his fiscal restructuring efforts. Harrisburg has an impossible pile of debt to service, and much of it needs to be discharged to make the city’s finances sustainable.

Fortunately the legislation that the receiver is working under relegates Harrisburg’s mayor, Linda Thompson, to a sideline advisory role. I’m sure the new receiver will have a few team photos taken with her and then promptly relegate her to parade and ribbon-cutting duty.

Make Jefferson County’s receiver its salesman

The story of Jefferson County, Alabama filing the largest municipal bankruptcy ever last week is well-known. The county went into hock for about $3 billion to build an EPA-mandated sewer system. On the way to completing the system, every local crook and corrupt politician piled onto the project to skim off some pork. Many of these players ended up in prison and left the taxpayers saddled with a sewer system they really can’t afford.

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. My advice to Jefferson County Commissioners is to stop fighting John Young and change his role into a salesman for the system. The sewer system is an albatross, and it should be sold and creditors repaid with the sale proceeds.

The Russell County Circuit Court’s mandate covered raising sewer rates and lowering costs but did not grant Mr. Young a role in facilitating a settlement with sewer debt creditors. According to Young, he took on that responsibility “unofficially.” He claimed to have traveled many times to New York City to negotiate potential haircuts on the outstanding debt, meeting repeatedly with JP Morgan, the biggest creditor, and other Wall Street banks. Young had a lot of experience dealing with Wall Street as the former president of the publicly-held American Water Works Company.

Harrisburg’s leadership shortage

Harrisburg is a town that’s been crushed by debt and years of incompetent management. The city has been led by a mayor, Linda Thompson, who is unable to work with a majority of her city council and who will likely find her role greatly diminished as the state takes fiscal control of the insolvent city. I’m not sure that I’ve ever seen a politician who has so little control over the affairs of her city. Edith Honan and Kristina Cooke of Reuters did an outstanding backgrounder about the level of dysfunction among the Harrisburg’s political class:

Prayers notwithstanding, [Linda] Thompson and [Comptroller] Dan Miller, the city’s top financial official, refuse to speak to one another, even as the city they lead continues hemorrhaging money. Thompson characterized Miller as a “political opportunist who will stop at nothing to accomplish his self-centered ambitions.” Miller, who plans to challenge Thompson for mayor in 2013, said he considers Thompson “paranoid,” “not well educated” and “a phony.”

His words seem kind compared with those offered by four former Thompson aides. They told the local newspaper that the mayor isn’t fit to hold office.

Jefferson County goes kaboom

Crushed by sewer debt and stripped of 48 percent of its general fund revenues by a state court, Alabama’s Jefferson County filed the largest municipal bankruptcy in history yesterday. The filing brings three years of financial chaos to an end and represents the largest default of municipal bonds and derivatives ever.

It’s been a long road for the county. In 1996 a federal judge ordered it to upgrade its sewer and waste water systems. To comply with that mandate, Jefferson County has issued over $3 billion in sewer debt, some of which was done in a blatantly illegal manner. The former Birmingham mayor and county commission president are now serving prison terms for bribery. Twelve others were convicted of bribery and conspiracy, and over twenty people involved in construction of the project have served jail time. The lead underwriter of the sewer debt, JP Morgan, also made the largest derivatives-related settlement with the SEC for an illegal payments scheme, although the bank admitted no fraud.

Jefferson County has been the poster child for muniland corruption for years as its residents have born the cost of the illegalities. Sewer rates have been raised 329 percent in the past decade. 500 county employees have been terminated. The county’s reserve funds have been depleted. Because of the crushing cost of the fraud the county has nowhere to turn but to the protection of federal bankruptcy court. With this filing, the county brings all court cases it is facing to a standstill and can halt debt payments until its massive liabilities have been adjusted.

The sharks circling Harrisburg

Harrisburg, Pennsylvania is being smothered by its outstanding debt of $463 million. The sharks are circling and the city has only about $244 million in assets that can be liquidated easily. Let’s guess how this game will play out.

The debt consists of two buckets. The first contains publicly-issued bonds, capitalized leases and various other loans and obligations that are considered “general obligations” of the city. This debt totals about $130 million and is in the form of stadium, redevelopment, sewer and other sundry municipal debt. The city has been paying approximately $12 million a year, or 20 percent of its annual revenue, to service this debt.

The second and bigger bucket is for approximately $330 million of bonds and loans that the city did not directly issue but did guarantee to fund the local incinerator and sewer plants. Although the city is backstopping this debt, it has been unable to make these payments recently and they have been paid by the bond insurer, the county and Covanta, a private company which as a management contract to run the incinerator plant. These debt payments were about $14.6 million for 2010.

Harrisburg is insolvent

The capital of the Keystone State is swirling with political infighting and power grabs over the issue of money. There is just not enough of it to pay all of Harrisburg’s creditors who have appeared at the door. Now that the county has said “Enough!” to providing more loans to cover debt payments, it’s the end of road and events are accelerating.

Harrisburg had already filed for municipal bankruptcy a week ago, but that didn’t stop the state from finalizing legislation that will put the city into receivership. Pennsylvania’s latest move adds another layer of complexity to the resolution process. The Harrisburg City Council responded to the state’s action with the following statement published in the Patriot News:

“First, they attempted to restrict the city’s ability to generate revenue and negotiate with its creditors, which were allowed in the Act 47 law, as well as penalize the city if it filed for bankruptcy. But that wasn’t good enough. Now, this takeover legislation gives a receiver unlimited power to sell any resource the city and its authorities have, without allowing Harrisburg an alternate source of revenue.”

Harrisburg has more than incinerator debt

The current bankruptcy drama in Harrisburg, Pennsylvania is just the third act of a long running effort to make the city something more than a corridor for those who commute into the city for work. Most of the current debt problems of Harrisburg stem from failed projects intended to revitalize the city and extremely bad business decisions.

The chart above shows the massive increase in Harrisburg’s population that occurred up to 1950 then starting falling steeply since mid-century. The city’s population was actually smaller in 2010 than it was in 1900. It’s just one of many American cities that has seen its vitality and population fade away.

Almost all the news coverage now is focused on the current players and their attempts to use the law to bend events towards their vision of the future. For example, the mayor, the county and the state are petitioning in bankruptcy court to halt the actions of the city council who filed for Chapter 9 bankruptcy. The bankruptcy judge will sort out these claims in an emergency court hearing on Monday. It’s high drama and makes for great journalism.

A Harrisburg scorecard

“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.

This Class is Unimpaired by the Plan

Ted Nesi @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.

Part-time employment up in muniland

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.

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