Once you have the gumption

May 21, 2012 | Bankruptcy, Cities, Municipal bankruptcy, Negotiation, Recapitalization, Receivership, US News, Workouts

By:David A. Smith


When a game is crooked, don’t play it – but if you are forced to play it, change the rules. 



That’s what states are doing with respect to their insolvent cities, as the combination of political autonomy and fiscal irresponsibility has led consistently and inescapably to bankruptcy or its equivalents, and that’s formed a curious club of economic hangmen, as reported in New York Times:


But after the condemned do


Distressed Cities Weigh Bold Tactics in a New Fiscal Era


By now it’s become clear that municipal bankruptcy is no longer an isolated event but a national, systemic failure that will become even more prevalent, if not epidemic.  And while individual debtors can misbehave in whatever fashion they choose, each state – which has many cities and towns within its borders – has to develop a strategy or policy from inception, otherwise it will get progressively ratcheted in exactly the manner Greece is seeking to ratchet the EU.  That’s why Grexit, as it has suddenly become known, is inevitable, and while some cities need to be made an example of.


Learn the neologism


Needs must when the devil drives.


“This is truly a new era for dealing with troubled municipalities,” said Michael Stanton, the publisher of The Bond Buyer, a public finance newspaper, which sponsored the packed two-day conference here [in Philadelphia] with Ballard Spahr, a law firm, and Public Financial Management Inc., a company that provides independent financial advice to governments around the nation.


The conference is packed because this is an outbreak of municipal zombies (to use the currently popular metaphor) and those still financially living need to close ranks against the hordes.


Learn defensive driving


Attempts to plug budget holes with one-time transactions are giving way to other approaches.


Just as financing will never fix a solvency problem, so too asset sales will never solve a solvency problem.  Solvency problems are fixed only by raising revenues (already exhausted by the cities) or cutting expenditures – and that takes a new weapon.


My turn


But Robert G. Flanders Jr., the state-appointed receiver for Central Falls, R.I., said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs.


Despite some unbelievably foolish articles, municipal bankruptcy does lead to municipal health.


Do I look bankrupt?


Before the city declared bankruptcy, he said, he had found it impossible to wring meaningful concessions out of the city’s unions and retirees — who were being asked to give up roughly half of the pensions they had earned as the city ran out of cash.


The monarchy really, really needs your allowance, okay?


“The municipality is on bended knee asking the retirees and unions to come to the table and give up their contract rights,” Flanders recalled. “All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger. And guess what? That produces agreements quicker and more effectively than otherwise.”


Sops up messy unfunded liabilities


Attempts to plug budget holes with one-time transactions are giving way to other approaches.


Just as financing will never fix a solvency problem, so too asset sales will never solve a solvency problem. 


A number of cities and counties around the country with long-term problems have found themselves pushed over the edge by the recession and its lingering aftermath. The audience here listened to war stories from the emergency fiscal managers that Michigan has installed in a couple of its most distressed cities.  [Then there’s Detroit’s emergency board. – Ed.  Even Nassau County, on Long Island, one of the wealthiest counties in the nation, has seen its perennially troubled finances placed under a state-appointed control board.


Helpless, I was repeatedly strafed by lobbyists


There is no amount of income so big it is proof against being squandered by profligate fiscal management, and in a democracy, the only way to take out the spendthrift managers is either to vote them out (which happens seldom in one-party-dominant cities) or to deny them access to the higher-level sovereign’s checkbook.  [Are you listening, Greece? – Ed.]


The conference was devoted to a discussion of the strengths and weaknesses of the more powerful tools being used in many cities these days, including receiverships, emergency declarations and even bankruptcy.


Clearing out political blockages


Changing the rules means changing the game, and these early players benefit from sharing experiences and discussing their thinking on strategy.  Then too, everyone else wants to absorb insights from those in the arena.


New woes were unfolding elsewhere even as a capacity crowd of government officials, investors, lawyers and credit analysts were gathering here to discuss the trend.


In Jefferson County, Ala. — which filed the biggest Chapter 9 municipal bankruptcy in American history this fall after its sewer-construction financing fell apart and a court threw out one of its taxes — county commissioners were voting to default on a General Obligation bond payment.


A GO bond default will be different from the longstanding defaults on the sewer authority’s bonds, but it is much of a piece.  If the county cannot pay debt service on its secured bonds, it certainly won’t be able to pay the unsecured ones.


In Detroit, city and state officials were sparring over how much emergency aid the city might be able to get, and how much state oversight and control would accompany it.  [As posted, the city basically gave way. – Ed.]


One by one, the dominoes fall – and each makes the next toppling easier to do.


Who’s next?


Stockton, Calif., was in negotiations in a last-ditch effort to avoid becoming the biggest American city yet to declare bankruptcy. And just two hours west of Philadelphia, Harrisburg, the state capital, recently announced that it would default on a payment coming due to general obligation bondholders.


Now that unthinking is no longer feasible, thinking is in overdrive.


Hope your thinking goes to eleven


It all gave a certain urgency to the discussions.


As Dr. Johnson said, “Depend upon it, Sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”


Richard L. Sigal, a lawyer who has played roles in many fiscal crises, including New York City’s in the 1970s, was wary of bankruptcy, arguing that the Chapter 9 law does not bestow the power to tax, cut spending or borrow — the tools that struggling governments need. “I have yet to see a situation where bankruptcy is the right option for any municipality,” he said.


That is, of course , arrant nonsense.


Others preferred the approaches some states had taken to avoid bankruptcies. Two of Michigan’s new emergency fiscal managers — Joseph L. Harris in Benton Harbor and Joyce Parker in Ecorse — talked about the sometimes unpopular steps they could take under a new state law giving them the power to reject contracts, including labor contracts.


Do I look like the enemy?  Joseph Harris of Benton Harbor, MI


We can also see receivership as a means of escaping the public-choice trap where elected officials give away excessive amounts of their city’s economic future in exchange for personalized political capital today.  Do that over and over again for several election cycles and the city is kaput – and only a receiver or bankruptcy (really, they are two ways of achieving the same thing) can set it to rights.


Pennsylvania officials explained their state oversight program, in which Harrisburg and 25 other municipalities are enrolled. Natwar M. Gandhi, the chief financial officer of Washington, D.C., spoke about how giving budgetary powers to an independent officer had helped put the nation’s capital on more solid financial footing.


Practice peaceful non-non-co-operation


But some of the most urgent exchanges concerned bankruptcy, which, in the past, cities sought to avoid at all costs.


Naomi Richman, a managing director at Moody’s Investors Service, wondered aloud whether it might become more acceptable for cities to declare bankruptcy.


“Back in the ’80s, the stigma against corporate bankruptcy fell away, and it became viewed as a strategy a corporation might pursue for various reasons,” Ms. Richman said. “Recently, with the residential housing collapse, individual bankruptcy has less of stigma in society — it’s a strategy that a person might be advised to follow if they have a debt that they can’t afford. Could the same thing happen for municipal bankruptcy?”


What is this, a trick question?


Can I phone a friend?