Municipal Bankruptcy

Chapter 9 and Alternatives – Part Two: State Programs to Assist Municipalities in Times of Fiscal Crisis


Chapter 9 and Alternatives – Part Two: State Programs to Assist Municipalities in Times of Fiscal Crisis ( )

by James Spiotto

As discussed below, over half of states have implemented municipal debt supervision or restructuring mechanisms to aid municipalities.  These programs, many of which are identified in the table below and which are described in detail in Municipalities in Distress?, range from the California Debt and Investment Advisory Commission and the Florida Local Government Financial Technical Assistance Program, which provide guidance for and keep records of the issuance of municipal bonds in those States, to the layered approach of Rhode Island to aid municipalities depending on a municipality’s level of financial instability.  Other States with these provisions have effectively used these mechanisms to control the restructuring of their municipalities.

State-Implemented Programs to Aid Municipalities

State

Intervention Provision

Arizona

School District Receivership

California

Debt and Investment Advisory Commission

Connecticut

Ad hoc State Intervention

District of Columbia

Financial Responsibility and Management Assistance Authority

Florida

Bond Financial Emergencies Act and Division of Bond Finance and Local Government Financial Technical Assistance Program

Georgia

Government Monitoring

Idaho

Debt Readjustment Plans

Illinois

Local Government Financial Planning and Supervision Act and Illinois Financially Distressed City Law

Indiana

Distressed Political Subdivision Protections and Township Assistance and Emergency Manager

Kentucky

County Restructuring Provisions

Maine

Board of Emergency Municipal Finance

Massachusetts

Ad hoc State Intervention

Michigan

Emergency Financial Management and Local Government and School District Fiscal Accountability Act and Local Financial Stability and Choice Act

Minnesota

Back-Up Payment Procedures for Municipalities and School Districts

Nevada

Local Government Financial Assistance and Audit Enforcement Act

New Hampshire

Emergency Financial Assistance

New Jersey

Local Government Supervision Act and Municipal Rehabilitation and Economic Recovery Act of 2002 and Special Municipal Aid Act

New York

Emergency Financial Control Board; Municipal Assistance Corporation; New York Financial Control Board

North Carolina

Local Government Finance Act

Ohio

Fiscal Watch; Fiscal Emergency; and the Fiscal Emergencies and Financial Planning and Supervision Commission

Oregon

County Public Safety Emergency and Fiscal Control Board and Municipal Debt Advisory Commission

Pennsylvania

Financially Distressed Municipalities Act; Intergovernmental Cooperation Act

Rhode Island

Fiscal Overseer; Municipal Receiver; Budget Commission

Tennessee

Emergency Financial Aid to Local Government Financially Distressed Municipal Procedures

Texas

Municipal Receivership

Wisconsin

Deficiency Protection for Public Improvement Bonds

States Recognizing Municipal Receivers: Rhode Island and Texas

Some States provide for the appointment of a receiver for troubled municipalities.  For example, in June 2010, Rhode Island enacted a law providing a process of progressive state intervention for municipalities in financial distress.  The new law created a three-step process for distressed government, in what was possibly an attempt by Rhode Island to prevent ad hoc efforts by municipalities to restructure with tactics that could be unfriendly to the municipal markets.[i]

In addition to the recent Rhode Island law and a law in Texas allowing for a judicially appointed municipal receiver, other States have chosen to allow for a financial control board, emergency managers, coordinators, overseers, or a financial commission to aid troubled municipalities.

Financial Control Boards and Their Progeny

Today, the laws of Florida, Indiana, Michigan, Nevada, New Jersey, New York, North Carolina, Pennsylvania, and Rhode Island include a variation on a provision allowing for the appointment of a financial control board or commission, emergency managers, receivers, coordinators, or overseers over a troubled unit of local government.  The intent of many of these provisions is to identify early signs of financial distress for a city or municipality so that the state may intervene before the city or municipality reaches the level of a municipal crisis.  Importantly, such provisions are not just a web of buried state laws never to be used but, rather, are applied where situations call for intervention.

The New York Experience.  Perhaps the most well’known appointment of a financial commission was the implementation of the New York City Financial Control Board in 1975.  In the spring of 1975, New York City was unable to market its debt because the bond market had discovered that, for more than ten years, New York City had been using questionable accounting and borrowing practices to eliminate its annual budget deficits.[ii]  Banks refused to renew short’term loans that were maturing or to loan additional cash to the city, and only state cash advances were keeping the city afloat.  The city’s spending for operating purposes exceeded operating revenues over several years, and the accumulated fund deficit could be resolved only by increasing amounts of short’term borrowing.  New York City itself had no funds to meet its short-term obligations.  New York City nearly defaulted on the payment of its notes in October 1975, and it was predicted that a default was likely in December absent federal aid.[iii]  In response, the State Municipal Assistance Corporation issued a series of securities on behalf of the city and a financial control board was appointed.

The New York City Financial Control Board was given the power and responsibility to review and provide oversight with respect to the financial management of New York City’s government.  Among other things, the act establishing the board required the city to prepare and submit a “rolling” four’year financial plan to the Financial Control Board prior to the beginning of each city fiscal year.

The Pennsylvania Experience.  Similar to the New York experience, Pennsylvania has implemented a series of provisions to aid ailing cities.  Pennsylvania law contains the Financially Distressed Municipalities Act, which applies to any county, borough, incorporated town, township, or home’rule municipality (Act 47).[iv]  Under these provisions, if the state’s Department of Community Affairs determines that a municipality is financially distressed based on certain triggering events, the department may appoint a coordinator to guide the municipality in getting its financial affairs in order.  Since 1987, there have been only 28 municipalities that have chosen to involve the Act 47 declaration of and determination of financial distress and only 9 so far have had the determination rescinded.

In addition to the Financially Distressed Municipalities Act, Pennsylvania law contains the Intergovernmental Cooperation Authority Act, which was created in 1991 to deal with insolvency issues faced by Philadelphia.  The act created a five-member authority with authorization to enter into intergovernmental cooperation agreements with cities, and these agreements were preconditions to the issuance of any obligations by the authority.  Among other things, the authority could issue bonds and the city and the authority were required to work together to develop a five-year recovery financial plan.

The Michigan Experience.  Likewise, the State of Michigan, under its former Local Government Fiscal Responsibility Act, has taken over the Detroit Public Schools, the City of Pontiac, the City of Ecorse, the Village of Three Oaks, the City of Hamtramck, the City of Highland Park, and the City of Flint.[v]  These provisions were subsequently replaced by the Local Government and School District Fiscal Accountability Act.[vi]  Under this act, if a school district or municipality was in a perilous financial situation, the governor of Michigan could declare a financial emergency.  Should the municipality or school district enter into a financial emergency and an emergency manager be appointed, the emergency manager had broad powers to operate and restructure the municipality, including the ability to reject, modify, or renegotiate contractual obligations.[vii]  As a last resort, this emergency manager could file a Chapter 9 municipal bankruptcy petition on behalf of the municipality.[viii]  This Public Act 4 of 2011 provided for a Michigan emergency manager with extraordinary power.  The act was very controversial, especially to local government bodies and elected officials.  A referendum placed on the November 6, 2012, ballot defeated Public Act 4 of 2011, the Michigan Emergency Manager Law.

On December 27, 2012, the governor of Michigan signed into law the Local Financial Stability and Choice Act,[ix] which replaced the defeated Public Act 4.  Also, in 2012, Indiana passed legislation allowing its Distressed Political Subdivisions Appeal Board to appoint an emergency manager for its distressed subdivisions on grounds and with powers similar to the Michigan emergency manager.[x]

The Massachusetts Ad Hoc Experience.  Similar to the laws of states establishing specific authority for financial control boards or similar commissions, Massachusetts has typically employed a system of implementing legislation on an ad hoc basis to create a financial control board or overseers for municipalities in severe financial distress.

The California Experience: Neutral Evaluator.  California also has experimented with the concept of introducing a third party to assist in the resolution of municipal financial difficulties.  California recently enacted a provision restricting the ability of its municipalities to file petitions to institute Chapter 9 proceedings.[xi]  The thrust of the legislation is to provide a period of objective and dedicated negotiation and resolution of issues affecting major creditors or financial problems.  The legislation provides for a neutral evaluation process, otherwise known as mediation, for major creditors and parties to the financial problems.  The neutral evaluator process provides a professional, independent, neutral advisor to serve as the supervising adult, which is the essence of a neutral evaluator.  The neutral evaluator can foster negotiations among the municipality and representatives of major creditor constituencies, including workers and union representatives, vendors, contract suppliers, holders of major claims including bondholders, judgment creditors, or others whose interests could affect the financial fate of the municipality.  The neutral evaluator process may not last more than 60 days from the date the evaluator is chosen unless the municipality or a majority of participating interested parties elect to extend the process up to an additional 30 days.  The neutral evaluator procedure is intended to be an expedited process and cannot last more than 90 days from the date of the selection of the neutral evaluator.

North Carolina Experience.  Due to a significant number of local government defaults during the Great Depression, North Carolina created the Local Government Finance Commission as part of the North Carolina Department of the State Treasurer.  The Commission provides oversight and assistance to North Carolina local governments.  No debt can be incurred by any local government in North Carolina without the supervision and assistance of that Commission and the oversight continues as to annual financial reporting and accounting of the fiscal health of the local governmental offering broad assistance in financial administration.  This is supervision of debt incurrence from cradle to payment in full.

The passage of a bill permitting a Chapter 9 filing should not preclude a state from taking the action other states have chosen short of a Chapter 9 filing to rescue their financially challenged municipalities.[xii]  These alternatives to Chapter 9 that certain states have provided to avoid the cost and stigma of Chapter 9 have been well-accepted and appreciated by the municipal market.  For this reason, every state provides for some form of refinancing of municipal obligations and some states provide various forms of oversight, supervision and financial support to the distressed municipality.  The ability to file Chapter 9 does not prevent as an alternative the oversight, supervision and refinancing of the debt of a financially challenged municipality as was done with New York City in 1975 and the formation by New York State legislation of a Municipal Assistance Corporation that helped supervise the financial recovery of the City and refinance its debt or similar assistance by Ohio to Cleveland in 1978 or by Pennsylvania to Philadelphia in 1991 with the passage of the Pennsylvania Inter-Governmental Cooperation Act.  Further, the passage of the Bill would not preclude the oversight and supervision of overseer, budget commission or receiver such as authorized by recent legislation in Rhode Island or the use of an emergency manager as permitted by legislation in Michigan and Indiana or financial control boards in New York State or Act 47 used in Pennsylvania.

Development of the Local Government Protection Authority

The experience of the New York Financial Control Board, Detroit with the emergency manager, the Rhode Island receiver approach, and the mediator of the California statutory scheme have coalesced in the concept of a local government protection authority.  (The draft of the Civic Federation’s description illustrating how such an authority would function is at https://www.chicagofed.org/~/media/others/events/2014/civic-federation/spiotto-042314-pdf.pdf)  Under consideration by some states is the use of a local government protection authority utilizing some of the best aspects from the mediation process of the neutral evaluator and the oversight and supervision of financial control boards and a receiver.  Under this municipal debt resolution mechanism, the state would establish an entity that would have a quasi-judicial function and power similar to a commission or special master appointed by a state supreme court or other objective nonpolitical process.  The members of the authority would be independent, experienced experts in governmental operation or finance as well as in mediation and debt resolution techniques, including bankruptcy.  The authority would start with those municipalities that petition for help or those municipalities that have triggered certain established criteria where the jurisdiction of the authority may be mandated by state law.  The first phase is mediation and consensual agreement by the municipality and the affected creditor constituencies similar to the neutral evaluator process.  However, participation by the authority may be voluntary by petition of the municipality or other affected constituencies asserting that a financial emergency exists or, under the most dire circumstance could be required, and negotiation and discussion of positions are strictly confidential.  The state law establishing the authority may have an exception to its open meetings law and its freedom of information law to allow for open discussion of any sensitive and confidential topics.  If additional tax revenues or loans or grants from the state are needed, recommendations to the state by the authority may be made.  The authority may be empowered to likewise call for a referendum on a local basis for increased taxes or other actions.  Specified time periods for resolution will be set forth and, if the voluntary process is not successful, the second phase may be requested or may be mandatory if the authority so requires.

In the second phase, the authority and its designated members turn into a quasi-judicial panel, and the municipality is required to set forth the steps to be taken to address its specific financial problem (recovery plan).  Creditors, workers, and taxpayers will have the ability to comment and to attempt, through negotiation, to modify the recovery plan within a set period of time.  Then, the recovery plan is presented to the panel members of the authority for determination of the plan’s feasibility and whether it is reasonably fair to creditors’ interests in relation to the requirement that, under all circumstances, essential governmental services, at least at an established necessary level, must be maintained for the reasonable future.  One of the triggers for the authority’s jurisdiction is the petition by the municipality, its workers, or taxpayers that a governmental function emergency exists.  The municipality or petition must state that essential services as to the health, safety, and welfare of its residents are being threatened and that the forced reduction in services, given the municipality’s financial condition and its revenues, impairs the health, safety, and general welfare of its residents.  The authority, after hearing all sides (municipality, workers, taxpayers, affected creditors), will determine:

  • What is sustainable and affordable;
  • What the municipality can afford; and
  • What adjustments must be made to the recovery plan to allow the municipality to continue to provide essential governmental services to its residents at established mandated levels to preserve the health, safety, and welfare of its residents and to pay what is feasible to its creditors, including workers’ wages and pensions.

The authority will act as an “honest broker” to mandate increases in taxes, where necessary; increases in contributions by the municipality or workers for pension or other benefits, if necessary; or reduction, delay, or stretching out of payments to creditors.  Further, if necessary to preserve the public health, safety, and welfare of the municipality’s residents, the authority will have the power to reduce workers’ wages, pensions, or other benefits.

A municipality that underestimates in its recovery plan its ability to pay creditors and workers will have necessary increases recommended and found by the authority to be required for the benefits of the workers and the creditors.  A municipality that overestimates its ability to pay or makes promises that are not sustainable and affordable will be subject to the recommendation of the authority that payments available to creditors be reduced and taxes possibly increased.  The findings of the authority will specify if they are final and enforceable by the parties or if further negotiations or proceedings are necessary.  The authority will be charged to make sure that the municipality and the state maintain access to the financial markets, and the ability to borrow will be protected if possible.  This authority process should help protect all parties, workers, vendors, and creditors and the taxpayers and the municipality so they will have needed means of continued financing credibility that can be accomplished on the local level based upon maintaining market credibility.  The authority can authorize the municipality to enforce its findings.  The findings, determinations, and rulings of the authority can have the force of law by providing that, if the legislature does not act within a short, specified period and overturn the act of the authority, it is the law.  Such means of enforcement can include having the recovery plan approved or revised by the commission as the basis for a pre-negotiated or “pre-packaged” Chapter 9 plan.  The authority can authorize the municipality to file a Chapter 9 proceeding based on the recovery plan as a pre’packaged Chapter 9 plan.  Such a pre-packaged Chapter 9 plan can significantly reduce costs, expenses, uncertainty, and financial market risk of a free’fall Chapter 9 proceeding.  In the corporate world, for instance, pre’packaged Chapter 11 plans (corporate plans of reorganization) have been confirmed in weeks rather than months or years with reduced costs, risks, and uncertainties.

This municipal protection authority concept could be the means of providing state and local government cooperation and oversight while allowing the municipality, its elected officials, workers and unions, creditors and bondholders to have a means of participation with a definitive end result.  Further, the resolution for affected workers and creditors can be hard-wired for a payment source of dedicated taxes for assured payment of wages, benefits, and creditor claims rather than the speculative hope of future payment at the willingness of future legislative actions.

The Structure for Oversight and Emergency Financing

Local governments that have encountered financial distress have resorted to financing and oversight authorities (such as New York City and Philadelphia).  This approach can involve various degrees of formal oversight and control.  In the beginning, it can be as simple and benign as a “commission” that reviews the city budget and makes recommendations based on new revenue sources.  If necessary, the authority can develop into a refinancing authority with full power to refinance existing debt of the local government and to authorize collection of new revenue sources or withdraw use of new revenue sources if budget recommendations are not followed or met.  There are two basic advantages to this approach:

  • The new independent issuer can have financial credibility and, therefore, access to borrowing in the capital marketplace if it has an assured source of revenue to pay debt service that is isolated from the bankruptcy and other legal risks; and
  • An independent authority can use various tools to enforce fiscal discipline on the local government because it can be removed from political pressures.

The basic idea is that the authority is given a revenue source.  It then borrows and assigns the revenue source to pay debt service on the bonds, payments to creditors and to provide funds for necessary infrastructure enhancement to foster improved economic growth.  The authority makes the bond proceeds available to the local government to pay its expenses and retire the deficit.  A basic legislative choice is whether the local government levies the new taxes and pledges the proceeds to the authority or the authority is the taxing body authorized to levy taxes.  In addition, the sub’sovereign’s ability to levy new taxes may be conditioned on a balanced budget or approval of the authority.  The New York Times has favorably reported on this concept of an authority as a structure to assist troubled cities deal with their problems, including issues of pension and debt obligations.  See Walsh, Mary Williams.  “Stepping Up with a Plan to Save American Cities.” New York Times, 12 Nov. 2013, NY ed: F16.

Financing through the authority can be used both for a long’term amortization of the cumulative deficit and, if necessary, for an interim period, to accomplish the annual revenue anticipation note borrowings that are necessary for the sub’sovereign to operate.  Different revenue sources might be used for each type of borrowing.  The disciplinary tools are important and a wide range of tools can be constructed, including the following:

Grants from the Federal, State or Regional Governmental Bodies.  Obviously, a source of funds has to exist from which to make grants.  The grant becomes a tool if the federal, state, or regional governmental body[xiii] imposes performance conditions as a precondition to any grant.  The federal, state, or regional governmental body can make the process more politically palatable by freely making a grant to the authority while requiring either in the legislation or in the grant documents that the authority impose performance requirements.

Loans from the Federal, State or Regional Governmental Bodies.  Instead of a grant, the federal, state, or local governmental body can make loans that require ultimate repayment.  The repayment terms can be varied depending upon the local government’s compliance with an approved financial plan and the achievement of goals over time.  That is, interest rates can be increased or decreased as needed; in a worst’case scenario, principal payment can be accelerated for a default.  There can also be in certain states the assumption of the obligations by the state.

Intercepts.  Part of the discussion in structuring grants and loans should consider “intercepting” the payments to the local government.  Legislation can be written that permits the state or regional governmental body to withhold these payments if the local government acts inappropriately or fails to act, or that permits those revenues to be pledged (e.g., paid directly) to lenders or bondholders.  In the implementation stage, there is an issue of whether special interest groups, such as unions, local financial institutions, or pension funds might have the ability and willingness to invest in such financing.  New York City had support from unions in purchasing significant positions of its refinancing debt.

Budget Process Involvement.  Having a financial plan to work out of the deficit, following that plan, and changing the plan as experience dictates are the keys to a successful workout.  The first step is to identify the problems and to stop the financial bleeding to the degree possible.

Required Financial Performance.  The authority can legislatively be given powers to participate in and monitor the local government’s budget process across a broad spectrum.  Ultimately, the teeth in the program are that bond proceeds or new tax revenue sources are not made available to the local government until it complies with the plan, and that continued compliance is required for a continuing revenue flow.  The legislation itself can contain the requirements, or it can authorize the authority to develop and establish the requirements.

Legislative Assistance.  A financially distressed local government comes as a somewhat recalcitrant beggar to the legislature.  An authority that is monitoring (and actively participating in) the local government’s recovery can give it credibility with the legislature or, alternatively, if the local government fails to make progress, can assist the legislature in developing new criteria and programs.

Moral Obligations of the State.  Some states may be constitutionally able to assume debt of a local government.  In such states an “extra-legal” state guaranty called a “moral obligation” is sometimes used to credit enhance bonds.

Appointment of Authority Members.  The makeup of the governing body of the authority is critical to its success.  Payment of its staff is important.  It is conceivable that some community leaders may be willing to serve without compensation if they believe the authority and its tools are capable of success.  Whether or not the local government is able to appoint or be represented on the authority is a question for the drafters of the legislation.

Acceleration of Loans.  If the authority makes loans to the local government, the loan could include the right to accelerate repayment of the obligations if the local government fails to comply with the recovery plan.

Publicity.  By participating in the local government recovery process, the authority can become a mechanism for disseminating both good and bad information about the progress of the local government’s recovery efforts.  Such information flow and disclosure will be helpful in building credibility with the investment community.  The experiences of New York City, Cleveland, and Philadelphia stress the importance of accurate and clear communication with the financial market.

Powers.  The authority can have as many or as few powers as the legislature may require, including but not limited to:

1.      Authorizing filing of a judicial action for municipal debt adjustment by the local government;

2.      Granting, after hearing and notice, a stay against litigation and debt enforcement;

3.      Approving or withdrawing future use of increased tax revenues;

4.      Rejecting or approving budget, financial plans, and future financing;

5.      Determining financial emergency or recovery;

6.      Approving, expediting, or withholding state aid and entitlement to taxes distributed to the local government;

7.      Approving or issuing bonds for refinancing or paying local government deficit or extraordinary operating expenses;

8.      Reporting to the state regarding the need for further legislative or disciplinary tools; and

9.      Transferring certain governmental services to other governmental bodies or consolidating governmental services on a regional basis or with other municipalities.

Consolidation of Regional Essential Governmental Services.  One interesting proposition for States is whether certain essential governmental services such as public safety (police and fire) or public health or education should be consolidated and combined on a regional basis to gain the benefits of the efficiencies and elimination of duplicative and overlapping services and administration.

Legislation can be written so that some or all of the above-described tools are available to the authority.  These tools can be designed and enacted so that they are mandatory or discretionary.  The choices and variations can be further delineated.  A variation of the intercept and periodic financial reporting has been used in connection with troubled debt securities issued by local government as a mechanism to ensure the flow of payments from taxes or fees to the bondholders.

Any state municipal refinancing or restructuring board should have sufficient power and authority under state law to effectively supervise a distressed local government.  Accordingly, any such municipal oversight and reference authority should be authorized to be able to:

1.      Require balanced budgets and provide economic discipline and reporting;

2.      Issue debt in the state’s name or as a separate entity to obtain market credibility and access;

3.      Have the power to negotiate debt restructuring and quasi-judicial jurisdiction;

4.      Review services or costs that can be transferred to other governmental bodies;

5.      Have the right to intercept tax revenue and ensure payment for essential services and necessary operating costs;

6.      Have the power to authorize a Chapter 9 filing if needed;

7.      Obtain bridge financing of, or refinance, troubled debt;

8.      Transfer certain services to other governmental agencies to reduce expenditures;

9.      Grant funds to the municipality to bridge the financial crisis;

10.      Provide funds to the municipality by means of a loan with terms that are realistic or payable from out-of-state tax sources that can be offset;

11.      Use an intercept of state tax payable to the municipality to ensure essential municipal service;

12.      Create private-public partnerships to lease and sell municipal properties to provide bridge financing and cash-flow relief;

13.      Develop a vendor assistance program to provide vendor payments through financing by purchase of vendor claims at a discount (fixed discount) and secured by payment from dedicated tax revenues over time or provide current cash flow relief from current or future vendor payments;

14.      Explore the consolidation on a regional basis of certain governmental services; and

15.      Monitor compliance with any restructuring plan to ensure compliance and prevent financial erosion.

In the next installment of this series, we will discuss the competing forces in a Chapter 9, including bondholders and other interested parties.

James Spiotto is Managing Director of Chapman Strategic Advisors, LLC and Co-Publisher of MuniNet Guide.


 

[i]           See “Assembly and Governor OK Measure to Prevent Municipal Receivership”; Available at http://www.rilin.state.ri.us/news/pr1.asp?prid=6591.

[ii]          For a detailed study of the New York City fiscal crisis see Donna Shalala and Carol Bellamy, “A State Saves a City: The New York Case,” Duke Law Journal, 1976(6) (January 1977); United States Congress, House of Representatives Committee on Banking, Finance and Urban Affairs, Subcommittee on Economic Stabilization, Securities and Exchange Commission Staff Report on Transactions in Securities of the City of New York (95th Cong. 1st Sess., August 1977).

[iii]        New York Times, October 19, 1975, Section 4 at 1.

[iv]         53 Pa. Stat. §§ 11701.101-11701.501.

[v]          Former Mich. Comp. Laws. § 141.2802 (this provision has been replaced by the Local Government and School District Fiscal Accountability Act).  See also Eric Scorsone, Local Government Financial Emergencies and Municipal Bankruptcy, Michigan Senate Fiscal Agency Issue Paper; Available at http://www.senate.michigan.gov/sfa/publications/issues/localgovfin/localgovfin.pdf.

[vi]         Mich. Comp. Laws §§ 141.1501’141.1531 (2011).

[vii]        Mich. Comp. Laws. § 141.1519 (2011).

[viii]      Mich. Comp. Laws. § 141.1523 (2011).

[ix]         Local Financial Stability and Choice Act, Mich. Pub. Act 436 of 2012, Mich. Comp. Laws, § 141.1541 et seq.  The new act contains 19 different possibilities that would allow for the state financial authority to conduct a preliminary review of a local government’s finances to determine the existence of probable stress. The state financing board is required to complete a final report and then to submit that report to the local emergency financial assistance loan board to determine if probable financial stress exists for the local government.

If probable stress is found, the governor is then required to appoint a review team for that local government, and that review team, after investigating the circumstances and meeting with the local government, must submit a written report to the governor within 60 days following its appointment, although it may be granted one extension of 30 days to conduct its analysis. In its report, the review team must conclude either that a financial emergency exists or that one does not exist, and within 10 days of receiving the report, the governor must also make a determination as to the existence or not of a financial emergency. The decision is appealable to the Michigan Court of Claims within 10 business days by a resolution approved by two’thirds of the members of the local government’s governing body.

Should a financial emergency be found, the local government must either (1) enter into a consent decree with the state, (2) agree to the appointment of an emergency manager, (3) enter into a neutral evaluation process or (4) file a Chapter 9 bankruptcy petition if so approved by the governor. If it does not choose an option, the local government must proceed under a neutral evaluation process. Each of the options provides a process for resolving the causes of financial distress.

If the neutral evaluation process or other options do not result in a resolution, the governing body of the local government must adopt a resolution recommending that it proceed under Chapter 9 and submit that resolution to the governor and state treasurer for consideration and approval by the governor.

[x]          Ind. Code § 6.1.1-20.3 et seq. (2012).

[xi]         Cal. Gov’t Code §§ 53760; 53760.1; 53760.3; 53760.5; and 53760.7 (as amended and added by Cal. A.B. 506; signed into law on October 9, 2011). This provision was first put to the test by the City of Stockton, California, which filed a Chapter 9 petition in June 2011 after going through a neutral evaluator process. San Bernardino in August 2012 avoided the neutral evaluator process by declaring a fiscal emergency, as discussed below.

[xii]        These alternative debt resolution mechanisms consistent with Section 903 of the Bankruptcy Code are described in detail in Chapter IV of Municipalities in Distress.  See also James E. Spiotto, “The Role of the State in Supervising and Assisting Municipalities in Times of Financial Distress,” 33 Municipal Finance Journal, (2013); The Pew Charitable Trusts, The State Role in Local Government Financial Distress, July 2013.

[xiii]      “Regional Governmental Bodies” could include counties, municipalities, or regional governmental bodies for special purposes such as transportation, public safety, or health services.

NEW_SECTIONNew York Fed’s Chapter 9 and Alternatives for Distressed Municipalities in States WorkshopEND_SUPP_HDR

On December 14, 2014, the Federal Reserve Bank of New York, the Volcker Alliance and George Mason University sponsored a workshop on Chapter 9 and alternatives for distressed municipalities and states.  This article is the second in a three-part series, based on a paper presented by James Spiotto, Co-Publisher of MuniNet Guide, who was among the participants at this workshop. For more information about the Workshop, please refer to the sidebar in Part One of this series.

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