The Municipal Analysts Group of New York How States Deal with Local Government Distress

February 07¸ 2014

William C. Rhodes, Esq.Chair, Public Finance DepartmentPractice Leader, Municipal Recovery InitiativeRhodes@ballardspahr.com215.865.8534

State Law Oversight and Remedies in Pennsylvania

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Nature of & Security for Municipal Debt

• Pennsylvania General Obligation Bonds

- Covenant to budget, appropriate and pay debt service

- Pledge of both (i) full faith and credit and (ii) taxing power

- Statutory caps on outstanding debt

- Constitutional and statutory remedies

• Pennsylvania Constitution, Article IX, Section 10

- Local government debt

• Debt Act, Section 8261

- Failure to budget debt service

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Pennsylvania Constitution

• Local Government Debt. Section 10. “Municipalities… incurring any indebtedness shall… make payments… at such time and in such annual amounts… as shall be sufficient for the payment of the interest thereon and the principal thereof when due.”

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Local Government Unit Debt Act

• Failure to budget debt service. Section 8261. “If a local government… fails or refuses to make adequate provision in its budget… for the sums payable in respect of the bonds or notes… the Court of Common Pleas shall… require… the local government unit to pay… the first tax moneys or other available revenues or moneys thereafter received… equally and ratably for each series for which provision has not been made.”

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Act 47: A Legal Perspective

• The Pennsylvania Distressed Municipalities Act

- Seeks to stabilize a municipality

• A short-term, not a long-term, solution

- Limited effect on outstanding debt

• Requires time and leadership

• Results in a “recovery plan” which identifies:

- New sources of revenue and improved revenue collection

- Cost savings and service efficiencies

- Improved management practices and long-term planning

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Act 47: Legal Requirements for Entry• Legal Criteria and Considerations

- Operating deficits, expenditures exceeding revenues for 3+ years

- Municipality fails to make a debt service payment, pension fund obligation, payroll for 30+ days, or fails to forward taxes withheld on employee income

- Accumulated deficits

- Failure to resolve impasses with creditors on a claim in excess of 30% of a fund or budget

- Filing under Chapter 9

- Municipality experiences decrease in quantified level of municipal service from preceding year after reaching statutory caps for real estate taxes

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Act 47: Benefits of Entry

• Capacity enhancements

• Political “cover” for elected officials

• Caps on Act 111 arbitration awards

• Priority access to economic development grants and loans

• Enables higher EIT (“Commuter”) Tax

• Bond market acceptance

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Act 47: A Pathway to Chapter 9?• Strategies for Long-Term Fiscal Recovery to Avoid or

Emerge from Act 47- Long-Term budgeting and planning

- Expand tax base through economic development and urban renewal

- Debt restructuring

- Working capital borrowings (TANs, Long-Term)

- Monetize assets

- Enhance existing revenue sources (taxes and fees)

- Cost control

- Consolidation of government services

- State or federal intervention

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Intersection of Act 47 and Chapter 9

• Act 47 authorizes a Chapter 9 filing under limited circumstances

- Chapter 9 filing must be approved by a majority of the elected officials of a municipality AND by the Secretary of the Department of Community and Economic Development (a Governor’s cabinet position)

• Any municipality that files for Chapter 9 will be automatically deemed to be a “financially distressed municipality”. (Westfall Twp. example, under old law)

• Act 47 and Chapter 9 are intended to be concurrent under PA regime

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Potential Available Remedies

• No statutory lien in Pennsylvania (exempt TANs)

• State intercept laws (schools in PA)

• Receivership / Oversight (control boards in Phila., Pittsburgh)

• Enforcement of full faith, credit and taxing power pledge

• Debt service reserve fund generally not maintained

• Foreclosure is generally not applicable

• Acceleration is not applicable

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Practical Limitations on Availability of Remedies

• Inherent priority of essential governmental services?

- The municipality’s primary obligation is to provide for the health, safety and welfare of its citizens.

- Some states expressly provide a priority for application of limited resources to essential governmental services prior to payment of debt service. PA does not, but local judges will anyway!

- Bondholders bear burden to prove operating expenses are not critical to the effective provision of essential governmental services in order to overcome deference given by courts to expenditure decisions by local officials.

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Practical Limitations on Availability of Remedies

• Are there enhanced constitutional protections afforded pensions or other parity obligations?

• Change in state law

- State legislators may approve changes to existing state law that may affect the nature or availability of remedies upon which bondholders may have relied when investing or which affect the credit even if they don’t impair the security

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Practical Limitations on Availability of Remedies• Mandamus

- Efficacy is premised on the municipality/public official willing to act in good faith in support of the municipality’s obligations, and possessing sufficient financial capacity (tax base) to comply with writ.

- Is the statutory obligation to perform an official action clear, mandatory and non-discretionary?

- A court may choose to withhold issuance of a mandatory writ in order to induce bondholder negotiations/concessions, or could choose not to issue a writ without explanation

- Difficult for a court to assess whether a higher levy will actually generate more tax revenue

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Practical Limitations on Availability of Remedies

• Classification of Creditors- A larger number of smaller holders may complicate the process

of compromise and settlement.

- Priority of claim. Is there a class of debt senior to the debt in question? Senior debt class can make remedial actions by junior classes more difficult.

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Practical Limitations on Availability of Remedies

• Negotiated settlement may be the actual likely outcome, and perhaps the only possible outcome, without going through Chapter 9 process. Settlements likely involve consensual "refunding" involving change of terms, extension of maturity, etc. under court mediation "guidance"

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Reforming Act 47 and Other Reforms

• Allow EIT to remain in place after emerging from Act 47

• Original jurisdiction on remedies moved to Commonwealth Court

• Act 111 should be governed by Early Intervention Program budgets

• Promote shared service arrangements by eliminating municipal code inconsistencies

• Provide for tax-base sharing through county-levied sales tax

• Provide effective process to handle non-viable municipalities

• Statutory liens in favor of holders of general obligation bonds

• Strengthen state intercept laws beyond school districts