Detroit’s record bankruptcy hasn’t solved one financial problem that’s plagued the city for at least a decade: Getting its annual financial report done on time, Bloomberg News reported yesterday. Detroit Mayor Mike Duggan’s administration will miss a March 31 deadline for releasing audited statements for the fiscal year that ended in June, the city said in a regulatory filing. The report is expected to be ready by May 31, the city said, because of holdups from the water and sewer department and library system. Such delays are legion in the $3.7 trillion municipal market, especially when it comes to distressed borrowers at the greatest risk of defaulting. That’s in part because the Securities and Exchange Commission has no direct power to crack down on governments that drag their feet in making routine disclosures, unless it finds evidence of fraud.
Residents in cash-strapped Atlantic City, N.J., said that they are worried about how they will manage if Mayor Don Guardian moves forward with his plan to close City Hall and suspend all nonessential city services beginning April 8, the Wall Street Journal reported today. Guardian said that the city has no choice because it is running out of money and state officials have rejected pleas for a bailout. Gov. Chris Christie (R) and Assembly Speaker Vincent Prieto (D) continued to blame each other yesterday for an impasse that has left Atlantic City on the edge of bankruptcy. Christie said that he wouldn’t provide aid unless state Assembly members approve a bill already passed by the Senate that gives the state full control over the city’s government and assets. Prieto has declined to put the bill up for a vote because he opposes a provision that would let the state alter collective-bargaining agreements with the city’s unions.
Politicians in Washington, D.C., are coalescing around a financial plan to rescue Puerto Rico, just weeks before an expected major default on bond payments that would spread more turmoil through the island’s shaky economy, the New York Times reported today. The plan, being drafted as legislation by House Republicans, would not grant Puerto Rico’s most fervent request: permission to restructure its entire $72 billion debt in bankruptcy. It would, however, give the island certain crucial tools that bankruptcy proceedings can offer — but only if it first comes under close federal oversight and meets other conditions. The oversight would be provided by a five-member voting board, selected by the president of the United States from candidates with expertise in finance, law or other relevant fields; at least two would have their primary residence in Puerto Rico. The secretary of the Treasury and the governor of Puerto Rico would also serve on the board, but would not have a vote. Read more.
A related Bloomberg News report found that the emerging U.S. House Republican bill to address Puerto Rico’s debt crisis would create a strong oversight board and a mechanism to force creditors to accept a restructuring deal, according to a congressional official familiar with the legislative efforts and a written summary. The board’s debt restructuring powers could include all creditors, but only after certain conditions are met, a congressional official said. The partial draft also provides for the board to petition a judge for a court-supervised restructuring, which would amount to a cram-down mechanism to force resistant investors to accept a deal. The proposal would be an alternative to a process under chapter 9 of the U.S. bankruptcy code, which Republicans have opposed. As part of the plan, lawmakers are also considering safeguarding Puerto Rico from legal action by temporarily prohibiting creditor lawsuits. Read more.
Sold, at bargain prices: bonds from New Jersey, where the transportation fund is going broke, the pension system’s shortfall is growing and the economy has been slow to recover from the recession. The $131 million deal Wednesday was the state’s first sale of general-obligation debt since 2014, Bloomberg News reported yesterday. The securities, with stronger credit ratings than those New Jersey typically sells, were priced with a top yield of 2.36 percent for those due in 7 years, some 0.9 percentage point more than benchmark debt, after the size of the offering was cut back by about $10 million. The state also borrowed $98 million through the building authority at yields as high as 4.1 percent on securities that mature in 2030, almost two percentage points over top-rated debt. “There are not too many situations out there besides Illinois that investors are getting paid right now for those risks and that potentially bumpy ride,” said Paul Brennan, a senior vice president in Chicago at Nuveen Asset Management, which oversees about $100 billion of municipal bonds.
Watch as ABI Editor at Large Bill Rochelle and ABI Resident Scholar Prof. Melissa Jacoby discuss issues that arose in the Supreme Court oral argument that took place in Puerto Rico v. Franklin California Tax-Free Trust. Click here to watch the discussion.
Democrats' support for emergency Puerto Rico legislation hinges on providing bankruptcy protection to the U.S. territory, the second-ranking House Democrat warned yesterday, The Hill reported. "We don't think it can be done without bankruptcy authority because we don't believe they'll get an ability to work out, with their creditors, payment schedules," said Rep. Steny Hoyer (D-Md.), the minority whip. Puerto Rico's debt has ballooned to more than $72 billion, and Democrats in the White House and on Capitol Hill have warned of an imminent humanitarian disaster if Congress doesn't act to help the territory manage the crisis. Speaker Paul Ryan (R-Wis.) said yesterday that a group of bipartisan House lawmakers will meet to discuss a strategy. The House Natural Resources Committee, he added, will take up a bill on April 13, a day after the House returns from its 19-day spring recess. But that bill has yet to be written, and there's wide disagreement over what it should look like. Democrats want to empower Puerto Rico to dump some of its debt unilaterally while restructuring its finances to prioritize state pensions above bond liabilities owed to private investors. But the investors with stakes in Puerto Rico's enormous debt are adamantly opposed to empowering the territory with sweeping new bankruptcy protections that were not in place when the investments were made and would likely batter their bottom lines. Read more.
In related news, the Supreme Court heard oral argument today to grapple with a First Circuit opinion striking down Puerto Rico’s own municipal bankruptcy law, according to an analysis by ABI’s Bill Rochelle. The high court’s decision, expected by the end of June, might give Puerto Rico the ability to adopt laws of its own to adjust the debts of its municipalities so long as they do not violate the Contracts Clause of the federal Constitution. Depending on how the high court writes the opinion, states not opting into the federal municipal bankruptcy system might also be able to adopt their own regimes to deal with their insolvent instrumentalities. The high court’s decision could turn in two directions. The justices might tackle the case as a straightforward, although complex, question of statutory interpretation. Or, the Court could plunge into the depths of constitutional law by making a pronouncement on federalism. Click here to read the full analysis.
Atlantic City’s mayor said that workers won’t be paid and non-essential services will be shut down for about a month beginning April 8 as the distressed gaming hub pushes for New Jersey to rescue it from the brink of insolvency, Bloomberg News reported yesterday. No employees would be paid until at least May 2, when the city will get its next installment of taxes, Mayor Don Guardian said yesterday. While essential services such as public safety and revenue collections will continue, other functions will cease and City Hall will close 4:30 pm local time on April 8. Moody’s Investors Service warned that the city could default on debt as early as next month without state action, and local officials have floated the possibility of filing for bankruptcy. Bills that would provide the city with a cash infusion and give the state control over its operations are pending in the New Jersey legislature.
The Supreme Court will hear oral arguments today on whether chapter 9 of the federal bankruptcy code, which does not apply to Puerto Rico, nevertheless preempts or makes illegal a law adopted by the commonwealth that would allow its utilities to restructure their debts, BondBuyer.com reported. Seven of the high court's members will hear arguments for one hour. The group will not include Justice Samuel Alito, who is recusing himself over a potential conflict, or a ninth member because the late Justice Antonin Scalia's seat remains vacant. The two consolidated cases — Puerto Rico v. Franklin California Tax-Free Trust and Melba Acosta-Febo v. Franklin Tax-Free Trust — pit Puerto Rico, its Gov. Alejandro Garcia-Padilla and other commonwealth officials against hedge fund BlueMountain Capital Management and two sets of mutual funds advised by OppenheimerFunds and Franklin Advisors. All of the funds together hold roughly $2 billion of the Puerto Rico Electric Power Authority's bonds. The commonwealth wants the high court to overturn a ruling last July by a three-judge panel on the U.S. Court of Appeals for the First Circuit in Boston. That ruling concluded the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (DERA) adopted by the commonwealth in June 2014 was illegal. Read more.
To read petitions and amicus briefs in preparation for today’s Supreme Court oral argument, please click here.
President Barack Obama dangles U.S. dollars before the Castros while Congress stonewalls Puerto Rico’s pleas for debt restructuring. The Tampa Bay Rays take the field in Havana as San Juan fends off New York hedge funds wielding legal baseball bats. The Rolling Stones play a free concert for Cubans. Puerto Rico can’t get no satisfaction, according to an OpEd in yesterday’s Bloomberg View. Even as the resumption of diplomatic ties with the U.S. opens new possibilities for Cuba, Puerto Rico’s current status as a U.S. commonwealth has turned into an ugly dead end. Puerto Rico is defaulting in slow motion on $70 billion worth of debt. Its economy has shrunk 9 of the past 10 years. A few hundred miles to the west, meanwhile, economic reforms are creating new livelihoods for self-employed Cubans, whose material conditions are improving. Buoyed by the arrival of new tourists, remittances, and foreign investments, Cuba’s economy grew by 4 percent last year. Read the full OpEd.
A new way that Grand Traverse County, Mich., began doing its books this year put pension and retirement costs on the balance sheet, which brought the county's nearly $59 million of pension and retiree health care debt to light and is now a huge budget problem, UpNorthLive.com reported yesterday. County Administrator Tom Menzel said that he believes the problem can be resolved and hopes to start talking about the debt issue with commissioners in April, and then start doing internal audits of departments in May. While Menzel said that there is still time to solve the problem, if things get worse and the county is unable to fund its mandated services, the state will bring in an emergency manager. He added that the county has only funded 48 percent of the pension liability and has funded zero percent of retiree health care obligations.
