Fiscal crises in Illinois and Chicago have diverted attention from the $8.4 billion in liabilities other Illinois municipalities faced in 2012, up from $4.1 billion in 2001, Bloomberg News reported yesterday. “In the next three to five years, you’re going to find communities in situations they cannot financially recover from,” said Scott Eisenhauer, mayor of the central Illinois town of Danville, with a population of 32,000. “Pension debt is now factored into bond ratings, and you’ll find that some of them won’t be able to borrow like they once did because of pension debt.” Illinois pays more to borrow than any of the 17 states tracked by Bloomberg, with investors demanding an extra 1.03 percentage points above AAA munis to own state debt, Bloomberg data show. The penalty trickles down to localities. The state itself faces a $100 billion pension liability, the largest in the U.S. In December, after years of inaction, lawmakers approved a benefit-cutting bill last December designed to wipe out the shortage in the next 30 years. Its fate is likely to be determined by the Illinois Supreme Court, but perhaps not until 2015.
Even as pension bombs tick, cities and states still borrow far beyond their means, according to a commentary by Richard Ravitch in Friday’s Wall Street Journal. Earlier this year, former Federal Reserve Chairman Paul Volcker and Ravitch released the "Final Report of the State Budget Crisis Task Force" after nearly three years of study and analysis. The report sought to understand whether the states' current fiscal problems were cyclical — caused by the financial collapse of 2008 and likely to abate with economic recovery — or whether they were structural, the result of long-term revenue and spending imbalances. The report's main finding is that in most states and cities the problems are structural and the crisis is deepening. First, contributions to employee pension funds are often well below the levels needed to ensure the payment of the benefits that are contractually or constitutionally guaranteed, let alone those that past trustees and legislatures added on a discretionary basis. The largest single expenditure in most state budgets is for Medicaid. Unfortunately, health-care costs have been rising faster than either inflation or state and local tax revenues, and most economists believe they will rise even faster in the next few years. But the most critical piece of the states' fiscal dilemma is that they are borrowing to cover their operating deficits. They do this directly — by issuing debt securities — but also indirectly. Some states, like New York, make contributions to their pension systems in promissory notes rather than cash. States and cities also sell assets and treat the proceeds as operating revenues, in effect selling off the family silver to stay afloat, according to Ravitch.
Flint, Mich., has faced its share of setbacks over the years — shuttered factories, dwindling population and urban decay, to name a few — but none has cast as dark a shadow as the prospect of filing for municipal bankruptcy protection, the Detroit News reported today. The struggling Genesee County community may soon be pushed over the financial cliff by a lawsuit. A group of city retirees is suing the city to stop proposed cuts to their health care benefits — a $5 million annual burden that could force Flint to become Michigan’s second-largest municipality to file for chapter 9 protection, following on the heels of Detroit. “The city won’t be able to stay solvent at this rate,” said Emergency Manager Darnell Earley. “I don’t want to see a bankruptcy in the city of Flint, and I’m going to do everything I can to make sure that doesn’t happen. If we get no relief from that retiree health care, then we have to start talking about that.” Today, nearly one-third of its population lives in poverty. Tens of thousands of jobs have been lost and about 15 percent of the workforce is unemployed. And the population — once nearly 200,000, ranking it as Michigan’s second largest city — struggles to stay above the 100,000 mark.
CalPERS has again agreed to push back its appeal of San Bernardino (Calif.)’s bankruptcy eligibility and cancel an August hearing in the 9th U.S. Circuit Court of Appeals, saying in a joint filing with the city that the delay is “critical to the success of the ongoing mediation,” the San Bernardino County Sun reported yesterday. The motion, which has been accepted by the court, changes the deadline for the pension giant — and largest creditor in San Bernardino’s bankruptcy case — to file an opening brief from today to July 21, arguing the city doesn’t qualify for chapter 9 protection, with the city’s response due by Aug. 20.
Stockton, Calif.’s creditors, including public workers, will have to wait a little longer to find out whether the city’s plan to exit bankruptcy will win a judge’s approval, Bloomberg News reported yesterday. At a hearing this week, the city sought approval of a plan that pays public worker pensions in full, while offering Franklin Resources Inc. only 1 percent of what its funds are owed. San Mateo, Calif.-based Franklin has argued that the pensions shouldn’t get preferential treatment. Bankruptcy Judge Christopher Klein initially scheduled a further hearing for May 29, followed by closing arguments. The hearing was changed to June 4 after Franklin’s attorney, James Johnston of the Jones Day law firm, told the judge a key witness wouldn’t be available on May 29.
Bankruptcy Judge Steven Rhodes indicated yesterday that the current timetable for finishing Detroit’s case might be unrealistic given the many disputes outstanding, raising questions about whether Detroit can exit bankruptcy before the end of its emergency manager’s term, the New York Times reported today. Judge Rhodes made the observation in a hearing after saying that he had heard that the state had promised to give Detroit some money — but only if the city could get him to approve its bankruptcy exit plan by the end of September. He said that state lawmakers needed to understand he could not guarantee meeting that deadline. Judge Rhodes concern stems over the large stack of objections to Detroit’s bankruptcy plan that piled up in the courthouse this week in response to a deadline. For months, a team of mediators has been trying to negotiate out-of-court settlements to Detroit’s many obligations, and until recently it seemed to be having remarkable success, particularly with the so-called grand bargain, which proposed to use the city’s famous art collection to raise $816 million for retirees’ pensions. http://dealbook.nytimes.com/2014/05/15/detroit-bankruptcy-deadline-may-…
In related news, a bond insurer wants the chance to fight Detroit’s effort to cancel $1.4 billion in pension debt, Bloomberg News reported today. The insurer, Financial Guaranty Insurance Co., along with investors who would be wiped out by the plan, wants to take part in a lawsuit Detroit filed to cancel the debt, which was issued in 2005 and 2006 to prop up public worker pensions. FGIC and the investors claim that a trustee now opposing the suit won’t represent their interests adequately. FGIC faces $1 billion in claims over pension bonds if the city succeeds in throwing out the debt, Edward Soto, an attorney for the bond insurer, told U.S. Bankruptcy Judge Steven Rhodes in Detroit yesterday. Canceling the debt will free up money to pay other creditors, said Chris DiPompeo, one of the city’s attorneys. Letting FGIC and the investors participate in the lawsuit would make the case more complex and may disrupt the city’s plan to seek approval of its debt-adjustment proposal in July, he said. http://www.bloomberg.com/news/print/2014-05-15/detroit-creditors-seek-t…
Additionally, Bankruptcy Judge Steven Rhodes refused to give some of Detroit's creditors unfettered access to art works and related documents in order to pursue a plan to increase the pot of money available for bankrupt Detroit to pay its debts, Reuters reported yesterday. Bond insurance companies Financial Guaranty Insurance Co. and Syncora Guarantee, as well as European banks and others had asked the U.S. Bankruptcy Court to direct the city and the Detroit Institute of Arts (DIA) to cooperate with their efforts to assess the art work in an effort to develop offers to monetize all or some of it. Judge Rhodes declined to force the city to cooperate with the effort, turning down a request to remove art work from the walls of the DIA for appraisal purposes. But he said that DIA was willing to give creditors access to works not on display. http://www.reuters.com/article/2014/05/15/usa-detroit-bankruptcy-idUSL1…
A group of residents and some local leaders are asking that certain parts of Jefferson County’s bankruptcy plan be voided, WVMTAlabama13.com reported yesterday. The group has filed a federal lawsuit against Jefferson County, upset over the sewer rate increase included in the plan. "The current bankruptcy plan places the County's most vulnerable residents at risk," said Sheila Tyson, Birmingham City Councilor. "Under the current plan, sewer rates will go up 450 percent over the next 30 to 40 years. That means if you're paying $70.00 per month today, your sewer bill will be $315.00 before the plan is over. That's just not right." Alabama Representatives John Rogers and Mary Moore and Jefferson County Commissioner George Bowman are all involved in the lawsuit.
Stockton, Calif.’s plan to exit bankruptcy by paying retired city workers more than some bondholders is being fought by the same law firm that helped Detroit craft a similar proposal to resolve its debt woes, Bloomberg News reported today. In closing arguments in Sacramento today, James Johnston of the Jones Day law firm is to argue that his client, Franklin Resources Inc., is being treated unfairly because Stockton is offering only 1 percent of what it owes the company’s funds, while public worker pensions will be paid in full. Stockton, a city of 298,000 people about 80 miles east of San Francisco, filed for bankruptcy in 2012 after spending too much on downtown improvement projects and property-tax revenue plunged in the housing crisis. Creditors filed $1.18 billion in claims. After months of negotiations, it reached deals with most creditors, including bond insurer Assured Guaranty Corp. and current and retired workers. The city is asking Bankruptcy Judge Christopher Klein to approve a plan that continues paying the California Public Employees’ Retirement System the full amount it’s owed. San Mateo, Calif.-based Franklin says CalPERS should be treated like any other creditor and face cuts.
Detroit's three automakers are mulling a request by the city's art museum to help it raise money for a key component of Detroit's plan to restructure its debt and exit bankruptcy, Reuters reported yesterday. Under an $816 million so-called grand bargain, the Detroit Institute of Arts would contribute $100 million to ease pension cuts on the city's retirees and avoid a sale of art works to pay city creditors. The rest of the money would come from philanthropic foundations and the state of Michigan, where a $350 million contribution over 20 years or a $195 million lump sum payment needs legislative approval.
The judge presiding over Stockton, Calif.’s bankruptcy case yesterday said that he will question officials from CalPERS to determine whether the nation's largest pension fund can be forced to take losses in the case along with other creditors, Reuters reported today. Describing the thorny question of whether the California Public Employees' Retirement System should remain whole while other creditors absorb steep losses as a "festering sore," Bankruptcy Court Judge Christopher Klein said he needed to consider alternatives for the matter. CalPERS contends its protected status is guaranteed under law, and Stockton, which declared bankruptcy nearly two years ago, has not tried to impose any losses on the $285.2 billion pension fund.
