By Dave Anderson:
If I was a decision-maker for a fiscally distressed and over-leveraged community, I would seriouly consider filing for Chapter 9 ahead of any cascade even if I was confident that my actions could contribute to setting off the bankruptcy cascade.
Chapter 9 is the federal municipal government bankruptcy code. It is rarely invoked but there are a couple of significant municipal entities currently in Chapter 9 as well as a double handful of smaller entities. Act 47 is the Pennsylvania fiscally distressed municipality law which is bankruptcy lite as it allows local municipalities to levy a wider array of taxes, renegoatiate current and future contracts down and access a limited amount of state technical expertise and low-cost financing.
Chris Briem notes that a small town in Pike County, Pennsylvania has recently completed a Chapter 9 filing and found substantial debt relief.
Read this press release from Pepper Hamilton on their work taking Westfall Township in Pike County Pennsylvania through Chapter 9 bankrtupcty. If I understand their math, they are touting their settlement of the municipality's debt at 30 cents on the dollar. I'd apply that ratio to the city's debt here, but people might get carried away. It would be a number far bigger than any potential net gain from sale/lease of the parking assets.
Actually the net present value of the settlement of debt is closer to 20% than 30% because the settlement was a nominal sum without interest that needs to be paid off over twenty years. An 80% haircut is a heavy loss for the bond-holders but that is why there is bond insurance which only works when no one is defaulting on their debt.
I have repeatedly written that it is worthwhile for a community to consider a strategic default if there current cash flow was sufficient to bridge five or more years without access to reasonably priced credit:
Local governments will be making a decision of taking a hit on their credit by defaulting or crippling their community with an escalating cycle of tax rate increases to produce flat or declining revenues and horrendous services. Sooner or later, pulling out of the credit market for five years will be very attractive.
Tripling or quadrupling local taxes in order to pay off a bad deal is the only option for non-default. That is a ridiculous thing for any political entity to consider, and that is why the original guarantee was ludicrous. We need to get the ludicrous and the ridicoulous out of the system so that it has a chance to work again. Part of this process will be municipal governments looking at their debt obligations and their capacity to pay with an eye on renegoatiating or walking away from the absurd.
If I understand the City of Pittsburgh's intermediate term budget, there is no plans for any major bond offerings. Indeed, Pittsburgh is planning on paying down and retiring a few old debt offerings in the next couple of years. The city is also anticipating a switch from small cash surpluses to structural deficits in the next few years again. Reducing debt service costs by 30% much less the 70% or 80% that Westfall Township would produce a massive amount of breathing room in the city budget and give the city enough cash to fix the potholes on Penn Avenue.
It is something to consider if the cramdown could produce significant savings instead of forcing the city into the perpetual vicious cycle of raising taxes on a smaller population base in order to satisfy fixed costs.
No comments:
Post a Comment