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Puerto Rico yesterday said that it would appeal a U.S. ruling that voided the island's restructuring law, saying that it left the U.S. commonwealth in legal limbo, Reuters reported yesterday. Late on Friday a U.S. federal judge ruled that Puerto Rico's so-called Recovery Act, which made some of its agencies eligible for court-supervised debt restructuring, violated the U.S. constitution by allowing a state government to modify municipal debt. "We believe that it is incorrect in law and has the effect of leaving Puerto Rico without a legal framework to allow our public corporations to comply with their obligations in an orderly manner without affecting the continuity of essential services that the citizenry receive," Puerto Rico Justice Secretary Cesar Miranda said.

Bankruptcy Judge Christopher Klein’s opinion last week confirming the city of Stockton, Calif.’s bankruptcy exit plan is as incisive in its rebuke of the California Public Employees’ Retirement System (CalPERS) as it is instructive about U.S. bankruptcy law, according to an editorial in today’s Wall Street Journal. Stockton declared chapter 9 bankruptcy in 2012, and it has since rewritten labor contracts and asked creditors for writedowns. Yet after being browbeaten by CalPERS, the giant public-pension fund, the city held pensions harmless, according to the editorial. CalPERS argued that the California constitution’s guarantee of contracts shielded pensions from cuts in bankruptcy. The fund also asserted sovereign immunity and police powers as an “arm of the state,” including a lien on municipal assets. Judge Klein upheld Stockton’s bankruptcy plan but not before effectively throwing CalPERS out of court. “It is doubtful that CalPERS even has standing,” he writes. “It does not bear financial risk from reductions by the City in its funding payments because state law requires CalPERS to pass along the reductions to pensioners in the form of reduced pensions.” As the judge explains, “CalPERS has bullied its way about in this case with an iron fist.” Calpers’s arguments are “constitutionally infirm in the face of the exclusive power of Congress to enact uniform laws on the subject of bankruptcy under Article I, Section 8, of the U.S. Constitution—the essence of which laws is the impairment of contracts—and of the Supremacy Clause.”

A U.S. federal judge voided a controversial law that allows some of Puerto Rico's public corporations to default on their debt, saying in a ruling late on Friday that the U.S. commonwealth’s “Recovery Act” contravenes federal bankruptcy law, Reuters reported on Friday. The decision in the U.S. District Court has implications for around $20 billion of debt potentially affected under the act. That includes $9 billion of debt outstanding at the Puerto Rico Electric Power Authority (PREPA), which is currently in restructuring talks with bondholders. "The Recovery Act is preempted by the federal Bankruptcy Code and is therefore void pursuant to the Supremacy Clause of the United States Constitution," Judge Francisco Besosa wrote in the ruling. "The Commonwealth defendants, and their successors in office, are permanently enjoined from enforcing the Recovery Act." Puerto Rico, which is struggling with debts of more than $70 billion, passed the Recovery Act in June. The law was intended to ring-fence the government from a potential bankruptcy and give the corporations a framework for restructuring their debt. U.S. law expressly forbids Puerto Rico's government and its entities from restructuring their debt under chapter 9 of the U.S. bankruptcy code, the section that deals with U.S. municipal bankruptcies and was used in the case of Detroit last year.

Wayne County, Mich., in which the formerly bankrupt city of Detroit is located, could face a fiscal crisis as early as August, according county documents released yesterday, Reuters reported. The county's general fund had an annual deficit of about $50 million during the last three years, primarily due to a decline in property tax revenue, an unsustainable defined-benefit pension plan, health care inflation, and budget overruns in the sheriff and prosecutors' offices, according to the documents, which accounting firm Ernst & Young prepared for the county. The projected fiscal year 2015 deficit for Wayne County's general fund is $73 million, according to the Ernst & Young document. The county's defined-benefit pension plan is severely underfunded, the document said, deteriorating from 95 percent funded in 2004 to 45 percent in 2013. It could slide to 39 percent by 2023, the document said. http://www.reuters.com/article/2015/02/05/usa-michigan-waynecounty-idUS…

For further analysis of the looming pension crisis in Ft. Wayne and elsewhere, be sure to register for the ABI Live Webinar “Pension Tension: Dealing with Plans in the Restructuring World” on Feb. 26. http://www.abi.org/events/abi-live-pension-tension#overlay-context=

Gov. Bruce Rauner (R) wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations, the Chicago Tribune reported today. The governor made no mention of the idea during his State of the State speech yesterday, instead burying the concept in a list of talking points the administration distributed to lawmakers. But the single sentence calling for the state to "extend to municipalities bankruptcy protections to help turn around struggling communities" mirrors a proposed law introduced last month by state Rep. Ron Sandack (R). Sandack said that his aim was to give cities more tools for getting their financial affairs in order, including a "level field" when negotiating over pensions.

Atlantic City Mayor Don Guardian said that the struggling casino hub in New Jersey, which has until today to repay a $12.8 million loan, is arranging a deal to sell $12 million in short-term notes, Bloomberg News reported yesterday. Guardian said that the city had been unable to sell the debt until receiving three offers Jan. 30: one in which the interest rate was too high; another that required the city to pledge state aid; and the winner. He declined to give specifics of the offer or say which banks were involved. Guardian said that the city council will vote today on a separate plan in which Atlantic City would kick in $800,000 to cover the final portion of the one-year notes that come due. The city could have repaid the full loan through cash and wasn’t willing to accept loan terms deemed too expensive, he said.

New Jersey State Senate President Stephen Sweeney yesterday slammed Gov. Chris Christie for appointing an emergency manager in Atlantic City as a sign that his administration wants the resort to declare bankruptcy, and pledged a "big fight" against such a move, NJ.com reported yesterday. Christie last week appointed attorney Kevin Lavin as the city's emergency manager and Kevyn Orr, who just presided over Detroit's bankruptcy, as an adviser. Reeling from the closure of four of its 12 casinos, Atlantic City is suffering from high unemployment and a collapsing property tax base. And while the governor did not say he intends bankruptcy for the city, Sweeney said that's what his move portends. "We will go to court, we will do whatever is necessary to stop this," Sweeney said.

State Representative Ron Sandack (R) filed legislation this week that would make Illinois the 25th state that allows municipalities to seek bankruptcy protections under chapter 9 of the U.S. Bankruptcy Code, the Chicago Tribune reported today. Illinois statutes currently do not allow for such authorization for municipal governments. "I hear regularly from municipal leaders who worry about their ability to pay their bills and meet other debt requirements," said Sandack. "This bill would provide one more tool that municipalities could have at their disposal to address their financial futures in a reasonable and taxpayer-friendly manner."

Detroit may offer city employees a 50 percent discount on homes sold through the city's auction program as part of its efforts to rebound after exiting its historic bankruptcy in December, Reuters reported yesterday. The proposal introduced to the City Council on Tuesday is for current city employees, their families and retired city workers. The idea is to encourage families to repopulate devastated neighborhoods that have seen a decades-long exodus by residents. The issue will be discussed tomorrow by members of the planning and economic development committee, who will decide whether to recommend it to the full council. If approved, the program could take effect by mid-February.

Moody's Investors Service slashed Atlantic City's credit rating six notches deeper into junk territory on Friday, a day after New Jersey Governor Chris Christie appointed an emergency manager with a mandate to consider a debt restructuring, Reuters reported on Friday. Atlantic City has about $344 million of long-term debt outstanding. Moody's dropped the city's general obligation rating to Caa1, down from Ba1, indicating that the credit rating agency thinks there is a substantial risk of default over the next five years. The order from Christie to consider a restructuring also marks a "rapid, dramatic" change from the usually strong oversight New Jersey provides its local governments, including the requirement that they pay their bond debts, Moody's said.