Archive for March, 2010

I just came across this blog from John Moorlach, Orange County.  Scroll down for a “five year lookback” on the discussion about San Diego, thought you might find it of interest.

Just thought I would post a really useful link for documents and explanations of the financial regulatory reform legislation as it moves through Congress.  As you know, the Senate Banking Committee approved the “manager’s amendment” and the discussion will likely go to the floor for debate, maybe after the Easter recess.  Like everything else in Congress these days, the vote was along party lines.

Governor Christie signed off on pension reform in the state of New Jersey.

The financial reform proposals, designed to eliminate systemic risk, could actually trigger another meltdown upon the bill’s passage.  This is due to the ratings notching approach that has given rating credit to government support since the meltdown.  A change in the expectation of support – both emergency and on-going would result in ratings downgrades for certain banks.  Standard and Poor’s for example, gives a three notch upgrade to the counterparty ratings of Bank of America Corp., Citigroup Inc and Morgan Stanley and two notches to Goldman Sachs and UBS AG.  Reverting to a lower stand alone rating could trigger collateral calls, terminations or other nasty events, not unlike what we have seen over the last three years.  My bank analyst colleagues are more sanguine about the likely outcome.  They suggest the banks would raise more capital, and by the time of passage, the underlying stand alone ratings could be improved.  But the House bill requires bondholders to take it on the chin before federal monies could be used.  And if the goal is to withdraw federal support, where would the capital come from?  While this issue may be better-understood by bank analysts I thought this should e brought to the attention of the municipal finance readership here.  Caveat counterparty.

Westfall Township, Pennsylvania filed a Chapter 9 bankruptcy petition in April, 2009 and the court confirmed a reorganization plan in March, 2010.  According to the law firm that handled the case:

Westfall Township, located in Pike County, PA, was saddled with a $20 million debt due to a prior government’s mistreatment of a developer.  Without the resources to pay anything close to the amount of that judgment, the township filed for Chapter 9 and was able to negotiate a settlement in the much more feasible amount of $6 million over 20 years without interest.

 “The Westfall Township case was a unique bankruptcy event because municipal reorganizations under the Bankruptcy Code are rarities in the U.S.,” said J. Gregg Miller, an attorney with Pepper Hamilton LLP.  “Filing for Chapter 9 in Pennsylvania requires cooperation between the federal bankruptcy court and the Pennsylvania governmental bureau in charge of financially distressed municipalities.

Pennsylvania is one of several states that have a distressed municipalities program.  Municipalities in these states are supposed to go to the state first, before they file in federal bankruptcy court. 

Why did the township file directly?  Act 47 as the Pennsylvania program is called, has two conditions that may allow a municipality to file bankruptcy directly.  First, the act of filing federal bankruptcy “shall be deemed to be a financially distressed municipality under the act.”  Hmmm. Sounds circular.  Second, if the municipality is in “imminent jeopardy of an action by a creditor, claimant or supplier of goods or services which is likely to substantially interrupt or restrict the continued ability of the municipality to provide health or safety services to its citizens.”  So there needs to be an imminent action against the municipality — not quite the Harrisburg situation at this point.

In the case of Westfall, there was a settlement with a developer a number of years ago that obligated the town to provide water and sewer services to the developer’s property.  The township never acted and the developer sued to get the town to act.  The court sided with the developer, and over time the obligation grew to $20 million. 

The state intervened in the case and the Department of Community and Economic Development appointed a coordinator to work with the township and the bankruptcy court to solve the problem.

Westfall doesn’t have bonds outstanding.  However, bank debt was modified by the bankruptcy court.  $2 million obligations to Dime Bank were suspended until April 10, 2010.  The loan term was extended for ten years at the same interest rate.  A note to Pennstar Bank for purchase of a truck was also extended for three years. 

Adverse settlements against small communities have led to Chapter 9 filings from time to time.  Looking through an official statement for outstanding litigation should be a basic part of an investor or analyst’s underwriting. 

By the way, Johnstown, Pennsylvania, which is under its fourth reorganization plan under Act 47 is considering a filing…see an interesting analysis of Johnstown and other Pennsylvania communities by the Allegeny Institute for Public Policy (conservative think tank) and their discussion of Chapter 9.

I am adding a link to this article that updates Toledo’s fiscal situation.  (See prior post.)  The city is wrestling with a budget gap and trying to negotiate with unions over compensation.  Ohio is a state that has a fiscal emergency program and municipalities may not file for bankruptcy without going through the state.  The state’s oversight of fiscal emergencies is useful but does not give the oversight panel the right to cancel contracts or replace management.  The biggest clout is the panel’s ability to prevent borrowing — a severe but important hammer for any city in fiscal emergency that may be facing a cash flow shortfall.

The tables below are for contextual reference as state and local governments face draconian spending cuts.   The combination of public policy with the several bubble periods over the last twenty-five years has created a toxic brew.  Some state and local governments are valiantly trying to tackle the issues while other legislatures and councils are more interested in fist pounding.  For those involved in financial analysis (as well as taxpayers) a careful eye is called for. 

State and local spending grew dramatically during the post-Reagan years of the “Program for American Recovery”.  A historic devolution of responsibilities from the federal government to state and local government was coupled with overall economic growth during this period.  I have commented on this issue in prior posts and the presentation I gave at the recent analysts’ conference.  The following tables are expanded to include the 1982-1992 decade.  The first set of columns show dollar increases in 1982 constant dollars.  To account for population changes from migration, which naturally cause increased spending for schools, infrastructure, healthcare, etc. the second set of columns shows the constant dollar increase in per capita spending.   Embedded in these figures are a complex set of decisions on spending, and different approaches to governance, not to mention divergent demographic and economic profiles across the states. 

click image for independent table

click image for independent table

click table for independent image

click table for independent image

 

Florida and Nevada top the list in the 1982-1992 decade with spending increases of 105% and 108% respectively.  Florida’s population grew by nearly one-third during this time while Nevada grew by more than 50%.  Per capita spending in Florida increased nearly 58% while Nevada increased 36%. 

On October 19, 1987, Black Monday, the stock market crashed,  followed by the savings and loan crisis and the Gulf War which combined to hit state and local budgets hard.  Mid-term elections during the Clinton administration resulted in Republican control of Congress and the “Contract with America” which further devolved responsibilities to state and local governments.  Some governments slowed their spending increases in the 1992-2000 period.  On a per capita (constant 1982 dollar) basis spending actually declined in some places.  (Note that these are combined state and local figures from the Census Bureau — most other sources, such as Pew, Rockefeller and Center for Budget Policy Priorities focus only on the states.) 

Population growth figures allow some analysis of the changes.  For example, Nevada had nearly 50% population growth which helps to explain a 7% decline in per capita spending during the 1992-2000 period.  New Jersey, in contrast, hard hit by the recession, had only a 7% increase in population but had a nearly 2% decline in per capita spending over the period.

(For the detail oriented reader, there is a minor change in the numbers since I adjusted for 2007 population — the prior tables used 2008 population. Data source: Census Bureau and Bureau of Labor Statistics.  Note that spending includes current year payments for retirement and health benefits but not capital outlay.)