MuniLand

Municipalities across the country are looking to local non-profits to pay for their share of community services. These payments, known as PILOTs, or “payments in lieu of taxes,” are voluntarily contributed by private schools, hospitals and other non-profits as an alternative to paying property taxes. As cities come under more fiscal stress, this will be a growing trend.

The mayor of Providence, Rhode Island, Angel Taveras, is in a wrestling match with Brown University over increasing the school’s annual payments to the city. Taveras is angling to get a bigger sum from Brown, but if he is unsuccessful, then his only option to balance his city’s budget would be to get public unions to agree to concessions. Others, including Robert Flanders, the receiver of nearby Central Falls, believe that Providence’s only option is bankruptcy:

“I don’t see how [Providence] can get out of it without going there,” said Flanders, a former state Supreme Court justice and a partner at Hinckley, Allen & Snyder LLP in Providence. He put Central Falls into bankruptcy in August and has since torn up contracts with city workers and cut pension benefits.

The situation Flanders faced in Central Falls is significantly different from that of Providence. Although Central Falls has some churches and small non-profits in the community, its only major institution, the Wyatt Correctional Facility, refuses to pay the city a monthly $25,000 “impact fee” until its bondholders are paid off. On the other hand, Taveras is hamstrung by a 2003 agreement that requires small payments from the local universities. The best report on PILOTS, from the Lincoln Institute (page 25), describes the arrangement:

In 2003 the City of Providence reached an agreement with its four private colleges for payments in lieu of property taxes totaling $48 million over 20 years. At the time Mayor David Cicilline argued, “With total annual budgets of $750 million, combined endowments of $2 billion, and over 25,000 students – the vast majority of them from outside of Providence – these institutions are thriving in our city. Yet for all the annual police, fire, public-works, and other services these enormous institutions consume, they pay virtually no compensation to 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.

Public pensioners everywhere should be worried today. There is devastating news from Central Falls, Rhode Island as the city’s receiver has cut the monthly pension payments to retirees. From WPRI.com:

Central Falls slashed one in three of its retirees’ pension checks by more than half this month, with the majority of the city’s former public-safety workers set to lose tens of thousands of dollars a year.

Receiver Robert Flanders reduced 48 of the city’s 141 police and fire pensions by 50% or more, with all but three of those cut 55% from their original amount, according to financial records obtained by WPRI.com.

Munis gain as stocks sell off

In a risky world, we’re seeing a flight to quality that’s benefiting muniland. From the Los Angeles Times Blogs:

Turns out it was a good idea to keep the faith in tax-free municipal bonds last winter when so many investors were bailing out.

It was an even better idea to buy more munis at that point.

While the stock market has dived this week investors have been bidding up the value of many muni bonds, apparently hungry to lock in tax-free yields.

Howard Cure, director of municipal research at Evercore Wealth Management, is asked in this Bloomberg video if Jefferson County, AL and Central Falls, RI are leading indicators of massive defaults in the municipal bond markets. He thinks not. After all, he says, these problems have been known for years.  For Cure, the real focus should be on what he calls the “three H’s:” hospitals, higher education and housing.  These entities are often heavily reliant on federal funds, which may be reduced in deficit negotiations. Muniland agrees and reminds everyone that there are vast differences in the fiscal and financial strengths of issuers.

Bondholders will win in trashed Rhode Island town

The Wall Street Journal is running a story on the Central Falls bankruptcy entitled “Bondholders Win in Rhode Island.” The story lauds how bondholders are ensured of receiving 100 cents on the dollar, although the bonds are currently valued at 62 cents on the dollar. Meanwhile retirees can expect their pensions to be cut by 34%.

Reading through the comments to a Providence Journal story on the threat to the state’s credit rating from the bankruptcy proceedings, I came across the following comment detailing the abject poverty of Central Falls, the community which is supposed to pay bondholders off at par. It’s shameful that a busted community would impose haircuts on all their creditors except bondholders.