The Story Behind San Bernardino’s Long Bankruptcy

Unlike Detroit or Stockton, this California city’s insolvency can’t be blamed on debt or pensions.

BY  | AUGUST 25, 2016

Four years ago this month, San Bernardino, Calif., filed for Chapter 9 protection. Today, it’s still in Chapter 9 -- the longest municipal bankruptcy in recent memory.

Why so long? Many blame it on San Bernardino’s lengthy and convoluted charter, a document that gives so much authority to so many officials that it’s completely ineffective. “It gets everybody in everybody else’s business,” said City Manager Mark Scott. “And it keeps anybody from doing anything.”

As a result, officials have spent the last two years trying to ensure the current charter is not part of the city’s future. A specially appointed committee is proposing to completely overhaul it.

At issue is that unlike many California cities that either have a strong mayor/council form of management or a strong city manager government, San Bernardino’s is a hybrid, doling out authority to both sides. For example, fire and police chiefs are appointed by the mayor and subject to approval by the council, but report to both the mayor and city manager. This confusing structure played a role in the city’s road to insolvency. “You’d have to say,” Scott said, “the charter made it almost impossible to succeed.”

,

SEC Censures 71 Governments for Lack of Fiscal Transparency

,
Financial timeliness is a problem that's 'widespread and pervasive,' the SEC said.
BY  | AUGUST 25, 2016

More than 70 state and local governments have been censured for failing to disclose certain financial information about bonds they sold to investors, the U.S. Securities and Exchange Commission announced Wednesday.

The SEC reached settlements with 71 governments across 45 states as part of a voluntary self-reporting program called the Municipalities Continuing Disclosure Cooperation Initiative (MCDC). Only five states -- Arizona, Florida, Nevada, Oregon and Rhode Island -- had no governments or government entities censured.

The number of citations show the problem is “widespread and pervasive,” said SEC Enforcement Director Andrew Ceresney in a statement.

MCDC is part of the commission's push for better transparency in the municipal market. Under the program, governments had to review documents associated with bonds they issued over the past five years. If they found anything amiss -- be it that they failed to disclose a previous annual financial report or didn't notify investors of a credit rating downgrade after the sale -- they could voluntarily come forward and obtain favorable settlement terms.

, ,

The Week in Public Finance: Demanding Better Government Disclosure, Uneven Recoveries and a Party at the Pump

, ,
A roundup of money (and other) news governments can use.
BY  | AUGUST 19, 2016

More Disclosure Pressure on Munis

Investors in the municipal market have long demanded better access to governments’ financial information, particularly since the 2008 financial crisis. But tired of waiting, an industry group stepped up its calls for federal regulators to intervene this week in a letter to the Securities and Exchange Commission (SEC).

“The failure to publicly disclose bank loans to all market participants can lead to unexpected rating changes that negatively impact bond pricing,” said Lisa Washburn, chair of the National Federation of Municipal Analysts (NFMA). The group is calling for governments to disclose all interim but relevant information, such as an approved fiscal year budget and tax receipts, as well as clearly report any long-term debt obligations.

The letter also suggests that the SEC adopt the authority to ensure that municipalities file their financial disclosures in a timely manner. Currently, there is no enforced deadline, and governments typically file annual reports anywhere from six months to a year after the close of a fiscal year.

The Takeaway: The problem from an investor point of view is that the more troubled an issuer is, the more likely it will delay releasing relevant financial information. Take Puerto Rico, which is essentially out of cash and only recently issued its annual financial report for the 2014 fiscal year.

, , ,

The Week in Public Finance: Why Some Pensions Are Falling Behind, Stress Testing States and More

, , ,
A roundup of money (and other) news governments can use.
BY  | AUGUST 12, 2016

Pollyannaish About Pension Returns

Houston is fighting a losing battle with its pension system: The unfunded liability between Houston’s three plans totals at least $3.9 billion, up from $212 million in 1992. Meanwhile, pension costs as a percentage of the city’s revenue have doubled since 2000 and were one of the reasons behind a recent credit rating downgrade.

A new report from Rice University’s Kinder Institute identifies two main culprits for the funding crisis: Even though the city is now paying its full pension bill, it’s still not enough to chip away at the unfunded liability, and the three plans have assumed investment returns of between 8 and 8.5 percent -- that's higher than the national average and even higher than their own recent experience.

The report's authors looked at examples of pension changes in other major cities and highlighted potential solutions, including raising the cap on the city’s revenues so it can generate more money for pensions; increasing employee contributions; and reducing cost-of-living payments to retirees. “All of these options would generate different amounts of funding in different time frames,” the report said. "[But] none would likely solve the problem alone.”

The Benefits of Helping Struggling Cities

For financially distressed municipalities, it’s good to be in a state that intervenes, according to a new study.
BY  | AUGUST 11, 2016

Earlier this month, New Jersey stopped Atlantic City from defaulting on its debt with a $74 million bridge loan. While there was plenty of bluster and several hollow threats from legislators that they would not step in to help the financially beleaguered gambling town, it didn’t surprise anyone when they finally did.

That’s because New Jersey has a reputation in the credit market for going to any lengths to prevent one of its municipalities from entering Chapter 9 bankruptcy. In fact, no New Jersey municipality has defaulted on debt since the Great Depression. This extra layer of protection is not only comforting to local officials in struggling cities like Camden or Trenton, it’s viewed as a big plus by those who invest in New Jersey municipal debt.

Now, preliminary research affirms the benefits of being a municipality in a more proactive state. Scholars at the University of Notre Dame and University of Illinois at Chicago have found that creditors tend to give municipalities in these states a slightly lower borrowing rate than they do municipalities in states without any kind of bankruptcy intervention program.

, ,

The Week in Public Finance: The Netflix Tax, Another Atlantic City Rescue and More

, ,
A roundup of money (and other) news governments can use.
BY  | AUGUST 5, 2016

Taxing Netflix

Pennsylvania this week became one of a few states that taxes online streaming video services like Netflix and and Hulu, a development that has consumers complaining but other governments watching closely.

The expansion of the state’s 6 percent sales tax was part of a revenue package passed earlier this year to fill a $1.3 billion hole in the state’s new $31.5 billion budget. Pennsylvania also extended the sales tax to digital downloads like music and ebooks. Sixteen other states already do that, but it has proven difficult to tax streaming services.

Last year, Alabama lawmakers tabled a study that would have expanded its 4 percent digital downloads tax to streaming services. Vermont looked at the issue but then the technology was more akin to a service than a tangible good. Massachusetts passed a wide-ranging technology tax in 2013 that was quickly repealed after the tech industry complained of the difficulties of complying to it. (For the record, Florida does apply a small communications tax to streaming services.)

Public Pensions Facing Worst Returns Since Recession

A volatile stock market over the past year has taken a toll on public pension assets.
BY  | AUGUST 3, 2016

Public pension plans are reporting dismal investment returns this year, a development that will likely mean governments will have to pony up more money in the coming years.

So far, no major pension plan has reported a preliminary annual investment return of more than 1.5 percent. That's thanks to a volatile stock market that's seen wild swings spurred mainly by political and economic events abroad. Some smaller plans, such as the New Mexico Educational Retirement Board, have reported earnings as high as 2.6 percent. Still for many, this year marked their worst earnings year since the Great Recession.

The slim earnings for fiscal 2016, which ended June 30 for most plans, is well below the average earnings target of about 7.5 percent. It also marks the second year in a row that plans have missed the assumed rate of return: Most reported an investment gain between 2 percent and 4 percent in fiscal 2015.

The Impact of New Overtime Rules on Government

The federal change won’t just hit state and local personnel costs.
BY  | JULY 28, 2016

A new federal rule that more than doubles the number of employees eligible for overtime pay has state and local governments scrambling. Already, governments are facing tight budgets and slow revenue growth. But the new rule, which goes into effect Dec. 1, threatens not only to increase personnel costs, but operating costs as well.

The rule change, which was issued by the Department of Labor in May, affects the earnings of both public- and private-sector workers. Governments are looking now at how much it will impact payrolls. But nonprofits are warning that the rule could also result in substantially higher rates next year for governments that contract services out.

The change is an update to the Fair Labor Standards Act and doubles the minimum salary that full-time white-collar workers must earn to be exempt from getting overtime pay to $913 a week, or $47,476 per year. The salary level was set at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census region, which is currently the South.

, , ,

The Week in Public Finance: Hot Munis, Cooling Off Creditors and Warming Up to Facebook

, , ,
A roundup of money (and other) news governments can use.
BY  | JULY 22, 2016

It’s July and Muni Bonds Are Hot

The municipal bond market could be off to its best start since 2010, when federal policies helped fuel new issuance. During the first six months of this year, a total of $221 billion in bonds have been brought to market by state and local governments, according to data from the Securities Industry and Financial Markets Association (SIFMA). The total includes new bonds and refinanced ones.

Most of that activity has come from the second quarter of the year, specifically in May and June when the volume of new bonds in each month was the highest since 2008, according to an analysis by RBC Capital Markets’ Chris Mauro. Even Puerto Rico’s recent default on a $2 billion debt payment has not appeared to phase investors or hurt interest rates.

The market is currently on pace to finish the year with over $430 billion in issuance. But with more than five months to go before the end of the year, anything could happen -- particularly with a volatile presidential contest underway. Last year, the pace cooled in the second half of the year, with the value of total bonds issued finishing just shy of $400 billion. Still, Mauro said he is increasing his original prediction of new bond volume to somewhere between $400 billion and $425 billion.

, ,

The Week in Public Finance: Unbalanced Budgets, Alaska's Tax Battle and Creditor Complaints

, ,
A roundup of money (and other) news governments can use.
BY  | JULY 15, 2016

Unbalanced Budgets

Fiscal 2017 isn't starting off so well for some states.

In Mississippi, officials announced they need to withdraw up to $63 million from the rainy day fund to cover declining revenues that left it with an $85 million budget shortfall. The announcement came just two days after the legislature removed the state’s restriction on how much it can withdraw from the fund in any given year. It reduces the state’s savings to just 1.4 percent of its general fund budget. Both moves drew criticism from Moody’s Investors Services.

Pennsylvania this week was placed on a credit watch by Standard & Poor’s rating agency for passing a budget that failed to offer a spending plan for more than $1 billion of it. Lawmakers eventually agreed on a revenue plan, but it still requires borrowing more than $200 million from a separate state fund.

Moody’s also criticized Kansas this week for yet another shortfall. We recently mentioned that Kansas is one of four states in a recession, according to federal economic data. Its total tax revenue was more than 7 percent short of what it expected for fiscal 2016. The state has struggled to meet its revenue expectations ever since lawmakers approved income tax cuts in 2012 and 2013.

,

Puerto Rico's Warning for States, Cities: You Might Be Next

,
Gov. Alejandro Garcia Padilla said the island's rescue might simply be a harbinger of things to come on the mainland.
BY  | JULY 14, 2016

President Obama recently signed into law a highly anticipated -- and much debated -- rescue bill for debt-laden Puerto Rico. While the bill has its detractors, it marks a positive step toward the promise of recovery for the island. But the bill's impact could go far beyond the commonwealth's shores.

Puerto Rico, like states and many cities, can't legally declare bankruptcy. Saddled with $70 billion in debt, Gov. Alejandro Garcia Padilla's administration has spent the last few years unsuccessfully trying to reach an agreement with creditors. During that time, the commonwealth watched its tax base decline as residents fled stateside and Puerto Rican government entities defaulted on debt.

That's what life without bankruptcy protection is like for governments, Padilla said this week in a speech at the Brookings Institution in Washington, D.C. He went on to suggest that Puerto Rico, with its smaller economy and population size, might simply be farther along on a path other U.S. governments are also traveling. "We are only ahead of the curve -- the curve that looms for many states and municipalities," he said. "We are forced to try the route that others have not tried before, to knock on the doors that others may need to approach in the not-so-distant future."

, ,

The Week in Public Finance: States in Recession, Higher Ed Winners and Losers, and Virtual Retirement

, ,
A roundup of money (and other) news governments can use.
BY  | JULY 8, 2016

Oklahoma's in a Recession

New economic data shows what Oklahoma officials have been fearing: The state has officially entered a recession. Revised federal Bureau of Economic Analysis (BEA) data shows that the state’s gross domestic product was negative for most of 2015.

A recession starts when there are two quarters of economic contraction. Originally, the BEA reported that Oklahoma’s economy contracted in the second quarter, grew by 0.1 percent during the third quarter and contracted again in the last quarter of last year. But the third quarter figure was recently revised downward to -0.6 percent.

Data for the first quarter of 2016 is expected to be released later this month, but according to State Treasurer Ken Miller, the prospects don’t look good.

“General indicators fail to point to any marked economic recovery at this point,” he said in his latest state economic report.

, ,

The $4.3 Trillion That States and Localities Are Missing Out On

, ,
Economic output would get a big boost if more women were in the workplace. A new report shows how far places have to go to close that gap.
BY  | JULY 8, 2016

Want to grow your economy? Close the gender gap.

That’s the advice from a new report that says states and cities could add up to $4.3 trillion to their annual economic output simply by focusing on policies that create a more equitable environment for women in the workforce.

The report, produced by the think tank McKinsey Global Institute, looked at levels of gender equality in measurable areas like political representation; workforce participation and leadership; educational attainment and teenage pregnancy rates. Overall, researchers found high gender inequality in many states and in some of the top 50 largest metropolitan areas.

"The real opportunity here is for a state to say, 'How could we do better? What are the levers that we can pull to get motivated and begin to address this?'" said Vivian Riefberg, one of the report's authors.

,

The Week in Public Finance: Rescuing Puerto Rico, Brexit Fallout and Minimum-Wage Trends

,
A roundup of money (and other) news governments can use.
BY  | JULY 1, 2016

Puerto Rico’s New Path

Congress this week has reached an agreement on a rescue bill for Puerto Rico. The troubled territory is set to default for a third time over the past year on a debt payment due today. The legislation, which was signed by President Obama Thursday, follows a long-running debate about whether Congress should intervene at all.

The bill, called the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, passed the House of Representatives earlier this month and the Senate on Wednesday. The legislation would allow the island a path to restructure its more than $70 billion in debt while installing a financial control board to govern its finances. It was modeled after similar legislation for Washington, D.C., whose finances were also subject to a control board two decades ago.

The Takeaway: The legislation won’t stop Puerto Rico from defaulting on its $2 billion debt payment Friday. But the fact that it now has a path to solvency -- however murky and long -- delivers a message of certainty to municipal market investors. To be sure, investors will take a hit and Puerto Rico’s officials will lose immediate control of the island’s financial future. But the process will be far more orderly than it has been in the past year or so. Litigation promised “to be endless and to consume scarce resources of the beleaguered commonwealth’s government," former New York Lt. Gov. Richard Ravitch pointed out in an op-ed this week

,

Who Should Police Municipal Markets?

,
A questionable bond sale in Illinois has left some wondering why there's no one to stop financially troubled governments from borrowing.
BY  | JUNE 30, 2016

Borrowers have long assumed that banks and other traditional lenders will only loan them as much money as they can responsibly afford. Almost a decade ago, the subprime mortgage crisis shattered that belief. But it might still persist in the municipal market.

Take Illinois, whose fiscal woes are no secret. It has the lowest credit rating (BBB+) -- by far -- of all 50 states, its pensions are among the worst-funded in the country and it's entering its second fiscal year without a budget. Yet earlier this month, Illinois borrowed more than a half-billion dollars from municipal market investors with relative ease.

The state paid a higher interest rate for its troubles. But thanks to the high demand for municipal bonds these days, the rate was actually lower than the one Illinois paid on its last bond issuance in January.

"That's the biggest weakness of the municipal market," said Matt Fabian, managing director for Municipal Market Analytics. "We will help issuers borrow as much as they say they want, whether or not they can afford it."

, , ,

The Week in Public Finance: What Brexit Means for Muni Bonds, Pension Projections and More

, , ,
A roundup of money (and other) news governments can use.
BY  | JUNE 24, 2016

What Brexit Means for the Municipal Bond Market

On Thursday, Britain voters shocked the world by deciding to exit the European Union in a vote that became known as "Brexit," a combination of Britain and exit. The result, which prompted Prime Minister David Cameron to say he will step down in the coming months, has implications for global financial markets, which in turn can affect the U.S. municipal market.

Even before the results of the vote were in, the uncertainty of the outcome was affecting markets everywhere. Global stocks and some corporate bonds had slumped while demand for traditionally safer assets like U.S. Treasuries and municipal bonds had “soared,” according to Ivan Gulich, senior vice president of the financial firm Loop Capital Markets.

This increased demand for municipal bonds has driven down interest rates, which is good for governments looking to borrow money. For example, the interest rate on a 30-year Treasury bond is currently lower than it was even in the wake of the Lehman Brothers' 2008 bankruptcy that roiled the corporate market and drove demand toward government securities.

“What was initially seen as an issue for Europe has rattled markets around the world,” wrote Gulich this week in an analysis.

After Milestone Year of Recovery, State Spending to Slow

States' overall budgets finally surpassed pre-recession peaks this year -- but not everywhere.
BY  | JUNE 22, 2016

This year was one of milestones for state budgets, but the upward swings of 2016 will likely be dampened in the years ahead.

It took almost a decade, but total state spending and revenues finally surpassed pre-recession peaks this year, according to a new survey from the National Association of State Budget Officers (NASBO). Yet more than two dozen states haven’t reached that milestone, a sign of the recovery’s uneven progress after the worst economic collapse in more than a generation.

While fiscal 2016 also marked the highest annual growth -- 5.5 percent -- for total state spending in nearly a decade, it was primarily driven by significant one-time spending increases and technical adjustments in several large states, including New York, Ohio and Texas. The median spending growth rate across the 50 states was 3.8 percent, which is lower than last year’s but slightly ahead of expectations a year ago.

Looking ahead, spending is projected to slow down even more, to 2.5 percent next fiscal year (which begins July 1 for most states). Revenues are also projected to slow.

, ,

The Week in Public Finance: Defending Wall Street Fees, Ranking Property Tax Rates and More

, ,
A roundup of money (and other) news governments can use.
BY  | JUNE 17, 2016

Defending Wall Street Fees

The performance fees that public pension plans pay private equity and hedge fund managers are coming under scrutiny. Some say the high fees aren’t worth the returns on investment and complain that many costs remain hidden. Those two points were part of a critical report last month by the right-leaning Maryland Public Policy Institute on Maryland’s hidden Wall Street fees.

Now, the Maryland State Retirement Agency has issued a lengthy response questioning the institute’s conclusions. In a letter published this month by Executive Director R. Dean Kenderdine and Chief Investment Officer Andrew C. Palmer, the system’s officials attack the institute’s methodology while defending its own financials.

Maryland reported paying $85 million in performance fees in 2014, but according to the report it may have actually paid more than $250 million. The policy institute made that estimate by comparing Maryland’s disclosed performance fee rate against the rate of performance fees disclosed by New Jersey, which has a similarly sized alternative investment portfolio and fairly comprehensive fee disclosure policy.

But Kenderdine and Palmer say Maryland's $85 million in reported fees are accurate because New Jersey has been “much more aggressive in its pacing of investments.” In other words, the private equity funds New Jersey invests in are designed to start producing returns soon after the pension puts money in the fund. Maryland’s private equity funds, however, haven’t hit that so-called harvesting period when investments are sold and managers receive performance fees from that profit, said Kenderdine and Palmer. So the performance fees are smaller but could theoretically be larger in the coming years.

,

Things You Didn't Know About Detroit's Historic Bankruptcy

,
Nathan Bomey, author of a new book on the largest Chapter 9 filing in U.S. history, reveals the unsung heroes and true timeline of the event.
BY  | JUNE 16, 2016

Nearly three years ago, Detroit's $18 billion bankruptcy -- the largest municipal Chapter 9 filing in American history -- captured the nation's attention. Detroit, like so many other Rust Belt cities, had suffered from decades of economic decline, as well as shrinking economic support from the state; mismanagement from city leaders that hurt the public trust and shattered finances; and the exodus of more affluent and generally white residents to the suburbs.

These effects and more are captured in the new book Detroit Resurrected. It's the first book to extensively chronicle the city's story into and out of bankruptcy, and it's written by journalist Nathan Bomey, who was the Detroit Free Press' lead reporter on the city's bankruptcy and is currently a writer at USA Today. Bomey, who spoke with Governing about the book, based it not only on his extensive reporting at the time but also on revealing and frank post-bankruptcy interviews with key players.

The following interview is edited for length and clarity.

I didn't know until reading your book that bankruptcy was being talked about in Detroit several years before 2013.

It was. In Detroit, the promises to retirees were actually broken many years before the bankruptcy process. I think the problem was [that by the time bankruptcy was considered], political leaders didn't really have the political will to make the tough decisions to avoid this type of process. So they put it off. And one factor in Detroit's bankruptcy that has been widely misunderstood is that the emergency manager law was uniquely tailored to make a bankruptcy go fast. Kevyn Orr got the job about four months before the city ultimately filed for bankruptcy. I think looking back on it, most people would agree that by the time he was installed, bankruptcy was probably inevitable.

, , ,

The Week in Public Finance: Punishment for Illinois, Budget Battles and New Jersey's Win

, , ,
A roundup of money (and other) news governments can use.
BY  | JUNE 10, 2016

A Battle Over Illinois’ Downgrade

Illinois was downgraded this week to two steps above junk status by Moody’s Investors Service. The downgrade is largely due to the state’s inability to pass a budget for the past year and a half. A political stalemate has crippled lawmaking in the state and Illinois -- already the lowest-rated state -- is being docked now with a Baa2 rating. The state’s current budget gap has only worsened over the past year. The structural budget deficit, including what Illinois is supposed be spending on pensions but isn’t, amounts to 15 percent of total general fund expenditures, Moody’s said. A day after the Moody's downgrade, Standard & Poor's also downgraded Illinois.

Apparently unperturbed by the fact that its overwhelming debt is what got it into this pickle, Illinois plans to borrow a half-billion in bonds later this month. The downgrade will likely increase the interest rate Illinois will have to pay on those bonds and impact the state’s outstanding $26 billion in debt.

Not long after the downgrade, the world’s largest money manager said investors should boycott Illinois’ upcoming sale.

“We as municipal market pa