Municipal Bankruptcy in California

Transcription

1 Municipal Bankruptcy in California History, Case Studies & Political Strategies presented by LOU PAULSON President, California Professional Firefighters

2 BEFORE 2011, CALIFORNIA HAD ONE OF THE MOST UNREGULATED MUNICIPAL BANKRUPTCY SYSTEMS IN THE NATION: - A majority of states do not allow local governments to declare bankruptcy, while others provide state oversight. - Less than a dozen other states let local governments declare bankruptcy with no standards and no oversight or intervention on behalf of taxpayers. Unregulated bankruptcy endangers taxpayers by giving local politicians a get out of jail free card for their bad decisions; Unregulated bankruptcy enriches bankruptcy lawyers; and Unregulated bankruptcy threatens public safety.

3 CASE STUDY: Orange County The 1994-declared Orange County bankruptcy created havoc among cities, school districts, sanitation and water districts and the County s employee retirement system. While in bankruptcy, every county program budget was cut, about 3,000 public employees were discharged, and all services were reduced. The bankruptcy was brought on by risky county management investment strategies. The County's finances weren t suspect until early As the Federal Reserve Bank began to raise U.S. interest rates, many securities in Orange County's investment pools fell in value. A cash crunch occurred when interest rates increased and county financiers required increased collateral from the county. Ultimately, the County s bankruptcy propagated a ripple effect that destabilized the municipal financial markets and ended up affecting jurisdictions statewide.

4 CASE STUDY: City of Vallejo On May 8, 2008, the City of Vallejo declared bankruptcy in the face of dwindling tax revenues, the housing market meltdown, a faltering economy and General Fund budget shortfall of $16 million created in substantial part by the abuse of its redevelopment agency. Vallejo created a redevelopment agency (RDA) decades ago and seeded that Agency with money by loaning it city general fund dollars. That loan to their RDA allowed the Agency to begin collecting tax increment dollars from surrounding schools, counties, districts and even the city s own general fund. When the RDA began to reach its limit to borrow in the mid to late 90 s, the city council forgave the debt owed to it by the RDA -- debt that exceeded millions of dollars. Upon filing, the City s bond interest rates converted to their maximums and shortly after, their bankruptcy litigation costs quickly escalated to over $5 million. As Vallejo s bankruptcy proceedings continued, the final price tag for damages escalated to nearly 30 times what the City s original deficit was prior to filing. Union busting was part of the City s agenda: Abrogating contracts and stiffing retirees, the bankruptcy judge had no authority to order that RDA-borrowed funds be repaid to the City General Fund, as the city had forgiven that debt.

5 AB 506 (Chapter No. 675, Statutes of 2011) In light of the Vallejo experience, the California Professional Firefighters and California Labor Federation joined together in co-sponsoring Assembly Bill 506 in 2011, which, after a handful of similar legislative attempts, was finally approved by the Legislature and later signed into law by Governor Jerry Brown. Per AB 506, California state law now provides that a local public entity may file under federal bankruptcy law only after participating in a specified neutral evaluation process, or that process can be bypassed if the governing board adopts a resolution declaring a fiscal emergency at a noticed public hearing. The resolution adopted must include findings that the financial state of the local public entity puts the health, safety or well-being of the residents into jeopardy. The legislative success enjoyed by the enactment of AB 506 was hard fought it represented one in a handful of previous, failed legislative efforts to reign in a municipality's unfettered bankruptcy access. And, while AB 506 isn t perfect, it is California s first step in the right direction.

6 Municipal Bankruptcy Checks & Balances The Long Road to AB : AB 1692 (Wieckowski, D-Fremont) A follow-up to AB 506. Authorized the neutral evaluator to toll the limitation period on the 60 day clock based on a finding that documentation and other information that the evaluator requested (including accurate financial information about the fiscal condition of the municipality) had not been produced. Also authorized the neutral evaluator to request and control the process of an independent investigation in an effort to obtain meaningful financial information and explore other areas of recovery. 2010: AB 155 (Mendoza, D-Artesia) - Allowed a local public entity, if California s Debt Investment Advisory Commission (CDIAC) approved, to file a petition and exercise powers pursuant to applicable federal bankruptcy law. Required the public entity to submit to CDIAC a proposed plan for restructuring debt, as well as related documentation showing the stated fiscal crisis. 2009: SB 88 (DeSaulnier, D-Concord) - Required a public entity to approve a resolution and send it to CDIAC before receiving authority to file for bankruptcy.

7 CASE STUDY: City of Stockton In June 2012, the City of Stockton filed for bankruptcy protection after being the first city to participate in the confidential, neutral evaluation process established by AB 506. Stockton is the largest city in U.S. history to file for bankruptcy. One month prior to the City filing, Bloomberg News reported that: Stockton didn t reconcile its main checking account each month and left millions of dollars in library fees uncollected, fueling a fiscal crisis as managers left. The fiscal 2010 accounting blunders offer a glimpse into how municipal leaders lost financial control, prompting a state investigation.

8 Stockton Files for Bankruptcy cont. Conversely, as grounds for filing, the City purported unsustainable employee compensation and retiree expenses, excessive debt load, and the national and regional economic downturn as the primary factors in its $26 million budget gap. In 2011, Stockton employees made significant concessions in an effort help the City avert bankruptcy: From sizable pay cuts (13%-23%), increased retirement contributions, hour furloughs, cutting nearly 200 public safety positions, increased out-of-pocket employee medical costs and many more. In total, Stockton employees gave $25 million in concessions in the fiscal year preceding the City s bankruptcy filing. In developing its proposed obligation adjustment plan, Stockton prioritized among its existing bonds and other debts based on whether the debts were secured or unsecured. Secured creditors are paid before unsecured creditors.

9 Government Code Section Section of California s Government Code provides that CalPERS has a lien on all assets of a municipality to secure liabilities owed to CalPERS upon the termination of the municipality s relationship with the system. As such, CalPERS argues that this lien creates a priority in their favor.

10 WALL STREET vs. CALPERS A group of bond insurers representing roughly $94 million of Stockton s revenue bonds have since filed a court pleading, which asserts the City failed to ask for concessions from CalPERS and thus, didn't negotiate with creditors in good faith. Their filing sets a roadmap for another battle -- one where Wall Street looks to take on the largest public retirement system in the U.S.

11 OTHER CASE STUDIES: Cities of San Diego, San Bernardino & Mammoth Lakes SAN DIEGO: Mayor Sanders threatened bankruptcy, citing an increase in pension costs, but later retracted. Like in Vallejo, a similar scenario of forgiving a RDA loan unfolded, but because of lessons learned in Vallejo, San Diego City Fire Fighters Local 145 and other local employee groups caught the city council before it could act (through a council consent agenda item) to forgive the RDA s debt owed to the City s General Fund - a debt that had grown to over $300 million. SAN BERNARDINO: Fiscal mismanagement and corruption per financial documents that had been falsified in at least 13 of the last 16 years resulted in a $45 million budget deficit that was looming when the City filed for bankruptcy on August, 1, Unlike Stockton, the City intentionally averted the neutral evaluation process established by AB 506 by way of a Council vote declaring a fiscal emergency. MAMMOTH LAKES: An unfavorable $43 million breach-of-contract judgment in a lawsuit brought against the City by a developer resulted in the High Sierra town filing for bankruptcy on July 2, The judgment was nearly three times the size of the town s annual operating budget, which was already $2.8 million in the hole.

12 CHAPTER 9: Authority of States Preserved View a transcript of General Counsel Peter Mixon s complete testimony to the CalPERS Board of Administration at:

13 RECURRING THEMES 1. Can t predict the dynamic among the players. In both Vallejo and Stockton, the creditors aligned themselves differently: Vallejo Banks allied with city and against the employee unions; Stockton At first, all creditors were against the city and now, it s the bond insurers vs. the unions and state s pension system. 2. Public employee compensation and their pensions are repeatedly cited by management as a leading cause for why their budgets are fiscally insolvent. It s the one-two punch approach: Threat of bankruptcy unless the retirement system is overhauled. 3. No sunshine on the governing body s irresponsible issuance of debt or abuse of its RDA. 4. To protect the community, employees are told they must bear the pain. 5. Political allies folded under pressure.

14 LESSONS LEARNED 1. Very few trusted allies; 2. Very few people really understand the true implications. While your labor attorney may be great on labor issues, he or she is not a bankruptcy attorney! 3. Those who control the information also control the message; and 4. More due diligence needed when it comes to keeping an eye on and understanding the implications of a jurisdiction s financial decisions. For example: Is the city current on its audited financial statements? Make a public issue of it, when they re not. What exactly does a city report when going out for a bond? What s the reason cities place debt forgiveness and general fund loan items on Council consent calendars? They hope you re not paying attention!

15 PROACTIVE STRATEGIES At all levels of government: 1. Federal Higher standards needed under federal bankruptcy law; 2. State Additional protections to safeguard against municipal bankruptcy filings. Additional protections to ward against abrogation of collective bargaining agreements (CBAs) and vested pension rights; and 3. Local More robust information made available about municipal budgets and the issuance of debt. Stronger community and public relations among those adversely affected by bankruptcy How will bankruptcy affect your community, businesses, local economy?

16 QUESTIONS?