Wednesday, September 29, 2010

To Harrisburg with love

Harrisburg is looking for lawyers with a very rare expertise: municipal bankruptcy in Pennsylvania. That is pretty much the long tail of the legal world.   Funny how there is no mention of anyone needing 'permission' from the state to file for bankruptcy, a common retort to those who think Pittsburgh could never have filed for bankruptcy in the past.  

Just think though, in Harrisburg's case the legal filings would not  have to travel far with correspondence never having to leave Harrisburg proper.. It is only about 6 blocks from Harrisburg City Hall to the PA Department of Community and Economic Development. The Federal Courthouse is even closer.

Anyway, see this from the American Lawyer just now: http://amlawdaily.typepad.com/amlawdaily/2010/09/the-bankruptcy-files-1.html

Or the Financial Times' Friday story: City of Harrisburg to seek bankruptcy advice

Bond Buyer: Harrisburg Council Rejects Selected FA Firm

WSJ version: Adviser Takes Heat for Helping Sell Off Public Assets

Something is going to give here and it is hard to tell what.

What I once said for Pittsburgh is as true for Harrisburg today. That was 8 years ago if you believe that.  This version was 5 years ago and the point is as valid today.. that any municipal bankruptcy has real costs on municipalities across the Commonwealth.

21 Comments:

Anonymous MH said...

I'd think the costs of going bankrupt would be lower now than before the recession. Basically, your reputation takes a hit, but the hit would be less when lots of big names have already gone broke. You also lose the ability to borrow, but who hasn't?

Wednesday, September 29, 2010 9:22:00 PM  
Anonymous MH said...

Anyway, the Harrisburg case looks, to my legal-trainingless eyes, like the kind of ideal set-up for a bankruptcy. One bad decision is dragging things down.

Wednesday, September 29, 2010 9:27:00 PM  
Anonymous BrianTH said...

At least in my view, the issue arising from the need for a municipality to get state authorization to enter Chapter 9 is not that it makes a municipal bankruptcy impossible in Pennsylvania. The issue is that in granting such authorization the state can set conditions and limits.

So people who argue things of the form, "Pittsburgh should declare bankruptcy and do X" need to understand that X can only happen if the state wants X to happen (X is typically something like "void the existing collective bargaining agreements). Accordingly, we'll have to see what happens with Harrisburg, but the mere fact they might enter Chapter 9 doesn't address the central issue I identified.

By the way, completely off topic, but the 2009 ACS estimated the City of Pittsburgh population at a higher level than at any other year in the series (which only goes back to 2002). Generally, I think if you fit the 2002-2009 data, it would show a statisticalyl significant upward trend. So the 2010 Census hardcount could be interesting.

Wednesday, September 29, 2010 9:52:00 PM  
Anonymous BrianTH said...

By the way, I don't know if Chris is expressing skepticism about the legal proposition, but it is quite straightforward. Section 190(c)(2) of the Bankruptcy Code provides:

"An entity may be a debtor under chapter 9 of this title if and only if such entity . . . is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter."

So mentioned or not in these articles, it is in fact a requirement for a Chapter 9 filing.

Incidentally, I've seen Briem make the point that a municipality doesn't need anyone's permission to be insolvent. Which is true. What a municipality does need is the state's authorization to ask a federal bankruptcy court to do something about its insolvency.

Wednesday, September 29, 2010 10:05:00 PM  
Anonymous MH said...

What a municipality does need is the state's authorization to ask a federal bankruptcy court to do something about its insolvency.

And, if things get bad enough, the state has three options: bailout the municipality, let it go to Chapter 9, or try to force the municipality to get more money. In an completely insolvent city, the last choice isn't really an option.

Wednesday, September 29, 2010 10:35:00 PM  
Anonymous MH said...

Anyway, the dominant financial theme of the past few years has been, "Let's pretend writing something down makes it true."

First, mortgage borrowers got to play, then mortgage guarantee agencies, and now mortgage issuers are coming to the end of their turn. I suppose municipal bond issuers go next, followed quickly by municipal bond holders. (Unlike mortgages, there was not guarantee implicitly backed by the federal government.)

Wednesday, September 29, 2010 10:46:00 PM  
Blogger C. Briem said...

Lots of things in code that are not terribly meaningful. Just consider the morass that would result if a municipality ran out of money and DCED did not allow a Chapter 9 filing. It would be chaos. Creditors I suppose could start foreclosing on chunks of city property. This just was not an issue with Westfall Township as best I can tell. If anything, the statute kind of forces the state to do something at the end of the day since they really are party to the situation that would result if 'permission' was not granted.

I also am just unclear if there is any precedent for a state not granting permission to go into chapter 9 bankruptcy. Bridgeport was not allowed to file becasue the judge ruled they had the fiscal capacity to get out of their immediate situation. New York City, despite mispercpetions, did not actually file for bankruptcy because the chapter 9 laws were different at the time and required potential files to first negotiate with each and every potential creditor.. something quite literally impossible for a government the size of NYC. I don't know if AHERF, which went bankrupt under Chapter 9, had the state's approval.. but of course it wasn't even a municipality which begs the verbiage cited. Basically, it's a mess and the state witholding permission in such a situation would create a circus. Hard to imagine they would do that even if by passive neglect.

Wednesday, September 29, 2010 11:02:00 PM  
Anonymous BrianTH said...

If your point is just that entering Chapter 9 could be to the advantage of the municipality and the state, then yes, that is often going to be true (although the recourse for creditors could be a lot more limited than you are assuming--for example, general obligations are considered unsecured). Note, though, that the state could seek to reorganize a municipality's financial situation even without Chapter 9--for example, that is what Act 47 is all about.

But as I noted above, the point about the municipality needing state authorization for a Chapter 9 filing is not that it makes a Chapter 9 filing impossible or unlikely in all circumstances. It is that it in turn allows the state to set conditions and limits on what can be done through Chapter 9. So, for example, if the state wants to mandate that the municipality fulfill its existing labor contracts regardless of a Chapter 9 filing, it can do that. That will just mean that other creditors may get less, and the municipality may have to sell more property or increase taxes more or cut services more, or so on.

I think it is worth taking a step back and realizing that all this is very different from a private firm bankruptcy, in part because of the power to tax. A private firm can't unilaterally increase revenues--they need a willing buyer for whatever goods or services they provide. But a municipality could unilaterally increase revenues through taxation.

Moreover, a municipality is typically providing all sorts of services for free. It could either start charging for those services, or stop providing them and save money.

So what does it even mean to say a municipality is insolvent? It means it can't pay its obligations at the level of taxation and provision of free services it has currently chosen. But that is still a problem for creditors, because they may have no ability to force the municipality to increase taxes or decrease expenditures on these services, even in default.

But because municipalities and states value the ability to borrow, they are indeed quite likely to want to do something to at least partially satisfy creditors in cases of financial distress, and they might use Chapter 9 to do that (or might not--again, see Act 47 as an alternative). But as I keep noting, the state can set conditions and limits, and that means it is ultimately not up to the municipality and the bankruptcy court how the municipality gets reorganized. Ultimately, that is up to the state.

Thursday, September 30, 2010 7:55:00 AM  
Blogger C. Briem said...

Maybe, but in reality it will be a screwey situational around.

To a degree the point in code about needing permission is gratuitious in that all local government everywhere are creatures of state government. State governments have pretty much all power when it comes to what local government gets to do. They devolve some of that power, but it is still the state's power. There is even an argument that given the city's home rule charter, there really would not be a need for explicit permission to file. But again precedent is limited.

I would disagree with the statement that municipalities can unilaterially raise taxes to raise revenue.. even in the short term that is sketchy and in the long run certainly false. Read research such as Bob Inmans work on "revenue hills" for municipalities. I do think it would worth litigating to set a precedent for how the law should measure fiscal capacity in situations like this. but since some Chapt 9 filings do go forward on occassion, there is realization that tax increases are not an unlimited source of revenue to meet obligations.

and yes, different from a private party bankruptcy. The big difference is that Chapter 9 is a cash construct/criteria. Doe an entitity have the cash to pay its near term obligations. Absent that there is not much chance to file. The concept of assets and liabilities is what would matter if you tried to file for bankruptcy, but those things mean something very different for a government. Other big difference again goes back to the state's perogatives and a separation of powers issue with the federal government. Chap 9 bankruptcy judge really has much more limited powers than in a private bankruptcy. Note there is no special master, or anyone at all for that matter, injecting themselves in what is going on in Vallejo. What goes along with that is that there really is no power for a judge to force a municipality to sell assets to pay obligations. Where would that stop anyway? The public forecloses on the public for the publicly promised obligation that cant be paid to the public.

I'll skip the whole discussion on what Act 47 is or isn't or what it is supposed to be or not.

Thursday, September 30, 2010 8:52:00 AM  
Anonymous MH said...

I would disagree with the statement that municipalities can unilaterially raise taxes to raise revenue.

Yes, and double yes.

Thursday, September 30, 2010 9:09:00 AM  
Anonymous MH said...

I'll skip the whole discussion on what Act 47 is or isn't or what it is supposed to be or not.

I thought Act 47 was a way for the state to cover its ass without having to spend any money or make a tough choice.

Thursday, September 30, 2010 9:15:00 AM  
Anonymous The Wiz said...

All this legalese and high finance is way above my pay grade. But it would seem to me that the state is exposing themselves to legal action should they limit any Chapter 9 filings.

If I were a bond holder of say $100 million and the state said that some certain union contract was off limits, that would jeopardize my ability to be repaid. Thus the state has liability in any legal action to get compensation.

"State governments have pretty much all power when it comes to what local government gets to do."

Like a corporation is held responsible for its subsidiaries, the state could be held liable for the municipality. Especially if the state steps in and starts making or limiting the financial options of said municipality.

Thursday, September 30, 2010 9:25:00 AM  
Blogger C. Briem said...

Thus the state has liability in any legal action to get compensation.

a novel theory... without any basis in American jurisprudence I suspect.

Gratuitous union reference in that. Pension provisions for a lot of muncipalities are by state statute as well as contracts.. or are not the result of collective bargaining.

Thursday, September 30, 2010 9:35:00 AM  
Anonymous BrianTH said...

"To a degree the point in code about needing permission is gratuitious in that all local government everywhere are creatures of state government."

Correct, but there would be a specific Tenth Amendment problem if a federal bankruptcy court tried to do certain things without state permission. That section of the Bankruptcy Code is codifying exactly how a federal bankruptcy court can get authority from the relevant state to do those things.

"I would disagree with the statement that municipalities can unilaterially raise taxes to raise revenue. . . . but since some Chapt 9 filings do go forward on occassion, there is realization that tax increases are not an unlimited source of revenue to meet obligations."

I didn't mean to suggest there was no practical limit to tax revenues. But municipalities don't need to have exhausted their practical ability to increase tax revenues before entering Chapter 9.

"The concept of assets and liabilities is what would matter if you tried to file for bankruptcy, but those things mean something very different for a government. . . . What goes along with that is that there really is no power for a judge to force a municipality to sell assets to pay obligations."

Exactly, and similarly the court won't necessarily have the power to void or modify various liabilities. That is my point about people who say things like, "the City should declare bankruptcy and void their labor contracts." That's not necessarily an option under Chapter 9.

I don't think we are really disagreeing much here. My point is that Chapter 9 still ultimately leaves it up to the state what a municipality can do about existing obligations. You are right that under the federal constitution that was already necessarily true, but that doesn't change the fact that Chapter 9 consciously codifies those principles.

Thursday, September 30, 2010 9:52:00 AM  
Anonymous MH said...

Gratuitous union reference in that.

I've noticed more of that lately. I think it is drifting over from New Jersey or the financial crash blogs. (But, where the teachers union is concerned....)

Thursday, September 30, 2010 9:52:00 AM  
Anonymous BrianTH said...

"Thus the state has liability in any legal action to get compensation."

Unfortunately for your creditor, the state also has sovereign immunity. That means it can only be sued if it decides to grant you the right to sue it.

By the way, if you are looking at all this and thinking to yourself, "lending to municipalities is kinda risky, since the state can limit my recourse options and is itself immune", well, you're in good company. Lots of people have been pointing this out recently, and to date lenders have ultimately been relying on municipalities and states not wanting to increase their borrowing costs. If a bunch of municipalities and states decide their interests lie elsewhere, a lot of creditors may end up taking losses.

Thursday, September 30, 2010 10:00:00 AM  
Anonymous MH said...

If a bunch of municipalities and states decide their interests lie elsewhere, a lot of creditors may end up taking losses.

They got TARP, but we'll get them back in the end.

P.S. States don't have sovereign immunity for debt, though I suppose they would for the debt of one of their municipalities.

Thursday, September 30, 2010 10:10:00 AM  
Anonymous The Wiz said...

My "gratuitous union reference" was merely a response to the example used by Brian TH posted 9:52 PM Wed Sept 29;

"(X is typically something like "void the existing collective bargaining agreements)."

Seems illogical that a state can have control over major financial decisions made by a distressed municipality but have no liabilities whatsoever. Seems under the "joint and several liabilities" concept, they would. If the state is making financial decisions, sets parameters for pensions and more, and can be said to have a financial interest in the outcome then they are an integral part of problem.

Thursday, September 30, 2010 10:21:00 AM  
Anonymous BrianTH said...

"States don't have sovereign immunity for debt."

I'm not sure what you mean. Consider, for example, the cases of Louisiana v. Jumel and Hans v. Louisiana. In those cases, Louisiana ended up refusing to pay coupons on bonds it had issued (first passing a law and then a constitutional amendment voiding the coupons) and the Supreme Court held in both cases that Louisiana's sovereign immunity under the 11th Amendment prohibited suit for the coupons without the state's consent.

"Seems illogical that a state can have control over major financial decisions made by a distressed municipality but have no liabilities whatsoever. . . . If the state is making financial decisions, sets parameters for pensions and more, and can be said to have a financial interest in the outcome then they are an integral part of problem."

That's sovereign immunity for you. Your ultimate remedy in cases like this has to be the political process, not a lawsuit, unless the state consents to be sued.

And undoubtedly the state is an integral part of the problem. A permanent fix to Pittsburgh's pension problems in particular will require reform of various state laws.

Thursday, September 30, 2010 2:29:00 PM  
Anonymous MH said...

You be sure to put a comment in the next time a state passes a law saying it won't pay interest on a bond.

Thursday, September 30, 2010 3:46:00 PM  
Anonymous MH said...

California came close and is now paying a higher interest rate.

Thursday, September 30, 2010 4:06:00 PM  

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