"General" Obligation Not a "General Obligation Bond?

Municipal Bond Buyers Conference

When Is a “General” Obligation Not a “General Obligation Bond”?

Political Risk in Times of Austerity

How States and Investors Can Deal with the Willingness to Pay vs. Inability to Pay Problem

February 2014

When Is a “General” Obligation Not a “General Obligation Bond”?

Political Risk in Times of Austerity

How States and Investors Can Deal with the Willingness to Pay vs. Inability to Pay Problem

Municipal Bond Buyers Conference

© 2014 by James E. Spiotto. All rights reserved. This presentation discusses the current state of the Chapter 9 market including a detailed analysis on these issues and bondholder rights and remedies. For further reading: Remarks of James E. Spiotto of Chapman and Cutler LLP to the U.S. Securities and Exchange Commission field hearing at Birmingham, Alabama on July 29, 2011 on the State of the Municipal Securities Market, Remarks of James E. Spiotto of Chapman and Cutler LLP, and a book entitled MUNICIPALITIES IN DISTRESS? published by Chapman and Cutler LLP which is a 50-State Survey of State Laws Dealing with Financial Emergencies of Local Governments, Rights and Remedies Provided by States to Investors in Financially Distressed Local Government Debt, and State Authorization of Municipalities to File Chapter 9 Bankruptcy, which is available from Chapman and Cutler LLP or on Amazon.com, PRIMER ON MUNICIPAL DEBT ADJUSTMENT, published by Chapman and Cutler LLP, which is available from Chapman and Cutler LLP, “The Role of the State in Supervising and Assisting Municipalities, Especially in Times of Financial Distress,” by James E. Spiotto in the MUNICIPAL FINANCE JOURNAL, Winter/Spring 2013 and “All Eyes on Detroit: What Happens to Unfunded Pension Liabilities When a Municipality Files for Bankruptcy?” MUNINET GUIDE (August 21, 2013), http:/www.muninetguide.com/print/php?id=604.

James E. Spiotto Managing Director

Chapman Strategic Advisors LLC February 24, 2014

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Table of Contents

I. Summary of Significant Chapter 9 Events during 2012 and in 2013 and G.O. Bonds in Chapter 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

II. Municipal Bankruptcy Chapter 9 Issues and Threats to G.O. Bonds . . . . . . . . . . . . . . . 7 III. Historical Question of Political Risk in Times of Austerity . . . . . . . . . . . . . . . . . . . . . . . . 26 IV. Causes of Recent Chapter 9 Bankruptcies to Be Avoided in Investing in

General Obligation Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 V. Chapter 9 – Treatment of General Obligation Bonds in Recent Cases. . . . . . . . . . . . . . 40 VI. Bondholder Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 VII. How to Determine If a General Obligation Bond Will Be Paid in a

Chapter 9 Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 VIII. Checklist of Considerations in Evaluating Repayment of

General Obligation Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 IX. Lessons Learned from Significant Chapter 9 Cases during 2012 and in 2013. . . . . . . . 67 X. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Appendix A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Appendix B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Appendix C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

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I. Summary of Significant Chapter 9 Events during 2012 and in 2013 and G.O. Bonds in Chapter 9

A. No Tsunami of Chapter 9 filings in 2012 or in 2013: –  Only 12 Chapter 9 filings in 2012 and 8 in 2013. –  Only 3 cities, towns, counties or villages in 2012, namely

Stockton, San Bernardino and Mammoth Lakes (which was dismissed that year) and only 1 in 2013 – namely Detroit.

–  Total Chapter 9 filings since 1937 – 652. –  Still RARE and mainly small special tax districts, municipal

utilities.

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B. Historically the use of bankruptcy by municipalities has been rare: –  Unlike corporations local governments rarely use Bankruptcy, Chapter 9 –

generally only special tax districts and small municipalities file. No large issuers of municipal debt (with the exception of Orange County, California in 1994, Bridgeport, Connecticut in 1991, Vallejo, California in 2008, Jefferson County in 2011, Stockton, California in June, 2012, San Bernardino, California in August, 2012 and Detroit in in July of 2013) have filed in the last 30 years. There have been only 652 Chapter 9 filings since 1937. In 2008, 2009, 2010 and 2011 there were 4, 10, 6 and 13 respectively, municipal Chapter 9 filings. In 2012 there have been 12 Chapter 9 filings of which only 3 have been cities, towns or counties (Stockton, Mammoth Lakes and San Bernardino). In 2013, there were 8 Chapter 9 filings and only 1 city, town, village or county, namely Detroit. In the last 3 years, there has been a reduction in Chapter 9 filings. There were 58,721 business (14,745 Chapter 11) filings in the year ending September 30, 2009 and 58,322 business bankruptcies (14,191 Chapter 11) filings in the year ending September 30, 2010.

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I. Summary of Significant Chapter 9 Events during 2012 and in 2013 and G.O. Bonds in Chapter 9 (cont’d)

–  Since 1954, virtually all of those municipalities that filed Chapter 9 were small or not major issuers of Bond Debt except for Bridgeport, CT in 1991, Orange County in 1994, Vallejo, CA in 2008, Jefferson County, AL in 2011, Stockton and San Bernardino, CA in 2012 and Detroit in 2013. Both Harrisburg, PA and Boise County, ID. In 2011 were dismissed as was Bridgeport in 1991. (See Section IX for Lessons Learned From Significant Chapter 9 Cases during 2012 and 2013.)

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C. G.O. Bonds are generally safe outside Chapter 9: –  Outside of Chapter 9 Municipal Bankruptcy, general obligation

bonds have traditionally been viewed as “safe” and “backed” or “secured” by an “inexhaustible” promise to pay from all available tax sources which can be enforced by a writ of mandamus.

D. Prior to 2013, no significant adverse treatment of G.O. Bonds in Chapter 9: –  Prior to Jefferson County’s Chapter 9 filing in 2011, there had

been no noted example of general obligation bonds from an issuer of size being “impaired” and not until Detroit were any g.o. bonds proposed to be significantly impaired. (See Medley Florida 1968.)

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The largest cities, towns, villages and counties to have filed Chapter 9 bankruptcy in the last 60 years (including Detroit):

8

Approximate Population

Approximate Debt in Millions

Orange County (filed 1994) 3,000,000 $1,974

Vallejo, California (filed 2008) 115,942 $175 (2008)

Jefferson County (filed 2011) 658,931 (2011)

$4,200

Stockton, California (filed 2012) 291,707 (2010)

$1,032 (2011)

San Bernardino (filed 2012) 213,012 (2011)

$492.3 (2011)

Detroit, Michigan (filed 2013) 701,475 (2012)

$18,500 (2013)

II. Municipal Bankruptcy Chapter 9 Issues and Threats to G.O. Bonds

9

Series1!

0

100

200

300

400

500

600

700

1938-72 1973-79 1980-2014* 1937-2014

362

7

283

652

FREQUENCY OF MUNICIPAL BANKRUPTCIES • 1937-2014 (as of 1/13/2014)

* Since passage of the Bankruptcy Code.

II. Municipal Bankruptcy Chapter 9 Issues and Threats to G.O. Bonds (cont’d)

10

11

1

12

4

43

22

2 4 1

4 6 1

4 1 3 4

11

4 1

60

1 2 1 3

13

5 1

4 6

38

1 1 4 4

0

10

20

30

40

50

60

70

AL AK AR AZ CA CO CT FL GA ID IL IN KY LA MI MS MO MT NC NE NH NJ NM NY OK PA RI SC TN TX UT VA WA WV

CHAPTER 9 FILINGS BY STATE • 1980-2014 (as of 1/13/2014)


11

4 1 1 3 2 1 3 2 3

0

10

20

30

40

50

60

CO FL IN MS NC OK PA SC TN TX

MUNICIPAL BANKRUPTCY FILINGS BY STATE 1954-1979


12

1 2

3 5 5

6

11

20

9 9 11

19

13 11

16

11

7 9

2

5

9 8

6 6 6

9

5 5 4

10

6

13 12

8

1 0

5

10

15

20

25

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

CHAPTER 9 FILINGS BY YEAR • 1980-2014 (as of 1/13/2014)


13

1 1 1 0

2 3

0 0 1

0 0 2 2

1 2

0 0 2

0 1 1

0

4

1 0 0

0

5

10

15

20

25

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

MUNICIPAL BANKRUPTCY FILINGS BY YEAR 1954-1979


14

168

53 48

8 6 0

20

40

60

80

100

120

140

160

180

Municipal Utilities and Special Districts

City, Village or County

Hospital, Health Care

Transportation School, Education

CHAPTER 9 FILINGS BY TYPE • 1980-2014 (as of 1/13/2014)


15

15 10 0 0 0

0

20

40

60

80

100

120

140

160

180

Municipal Utilities and Special Districts

City, Village or County Hospital, Health Care Transportation School, Education

MUNICIPAL BANKRUPTCIES BY TYPE • 1954-1979


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Admitted Losses: $76,615,745

Amount Paid or to be Paid as Extended:

$140,614,796

MUNICIPAL BANKRUPTCY RECOVERY 1938-1972*

* See Table 5-1, City Financial Emergencies: The Intergovernmental Dimension, Advisory Commission on Intergovernmental Relations, July 1973.

Total Filings: 362 Total Cases Dismissed: 79 Total Cases Still Pending 1972: 10 Total Cases Concluded: 273 Aggregate Admitted Debts: $217,230,541 Average Debt Per Filing of Cases Concluded: $795,716 Average Percentage Recovery on Cases Concluded: 64.7%


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Aggregate Losses: $3,457,621

Aggregate Amounts Paid or Paid as

Extended: $9,770,003

MUNICIPAL BANKRUPTCY RECOVERY 1954-1972*

* See Table 5-1, City Financial Emergencies: The Intergovernmental Dimension, Advisory Commission on Intergovernmental Relations, July 1973.

Total Filings: Aggregate Admitted Debts Average Debt Per Filing: Average Percentage Recovery:

18 $13,227,624

$734,868 73.9%


18

169

101

38

101

41

16

0

20

40

60

80

100

120

140

160

180

Cases Confirmed Cases Dismissed Cases Pending or Disposition Unknown

Cases Confirmed Cases Dismissed Cases Pending

1954-January 13, 2014 1994-January 13, 2014

DISPOSITION OF CASES

308 Cases Filed 158 Cases Filed 54.9% Resulted in Plan Confirma7on 63.9% Resulted in Plan Confirma7on


A. Who is eligible to file Chapter 9? Only those municipalities that are specifically authorized by their State law can file. States cannot file for Chapter 9 since States are co-Sovereigns with the Federal Government and Chapter 9 is limited to local governments that are specifically authorized to file.

B. To be a debtor in a Chapter 9, an entity must be: –  An entity that is a municipality (political subdivision, public

agency or instrumentality of State – States are a co-Sovereign with the Federal Government and cannot file for Chapter 9).

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–  Specifically authorized under State law to be a Debtor:   Twelve States have Statutory Provisions in which the State specifically

authorizes filing without any conditions (AL, AZ, AR, ID, MN, MO, MT, NE, OK, SC, TX, WA).

  Another twelve States authorize a filing conditioned on a further act of the State, an Elected Official or State entity or neutral evaluator (CA, CT, FL, KY, LA, MI, NJ, NC, NY, OH, PA, RI).

  Three states (CO, OR and IL) grant limited authorization, two states prohibit filing (GA) but one of them (IA) has an exception to the prohibition. The remaining 21 are either unclear or do not have specific authorization.

  Those states that authorized municipalities to file Chapter 9 without any conditions had 5 times more filings than states that had conditions to file and required a second look.

  Only 53 of the 283 Chapter 9 filings since 1980 involved cities, towns, villages and counties and of the 53, at least 24 (45%) never had a plan confirmed.

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–  Insolvent:   Proving insolvency can be challenging. As Municipality has to

prove it is not paying its debts or is unable to pay its debts when they come due.

–  Willing to effectuate a plan. –  Either have obtained the agreement of creditors holding majority

amount of the claim of each class that the municipality intends to impair or have attempted to negotiate in good faith, but was unable to do so or it was impractical to negotiate with creditors or a creditor is attempting to obtain a preference.

21


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12 States that specifically authorize municipal bankruptcies: Ala. Code 1975 § 11-81-3 Ariz. Rev. Stat. Ann. § 35-603 Ark. Code Ann. § 14-74-103 Idaho Code Ann. § 67-3903 Minn. Stat. Ann. § 471.831 Mo. Ann. Stat. § 427.100 Mont. Code Ann. § 7-7-132 Neb. Rev. St. § 13-402 Okla. Stat. Ann. tit. 62 §§ 281, 283 S.C. Code Ann. § 6-1-10 Tex. Loc. Gov’t Code § 140.001 Wash. Rev. Code § 39.64.040

Cal. Gov’t Code § 53760 Conn. Gen. Stat. Ann. § 7-566 Fla. Stat. Ann. § 218.01 and §218.503 Ky. Rev. Stat Ann. § 66.400 La. Rev. Stat. Ann. § 39-619 Mich. Comp. Laws § 141.1222 N.J. Stat. Ann. § 52:27-40 N.C. Gen. Stat. Ann. § 23-48 N.Y. Local Finance Law § 85.80 Ohio Rev. Code Ann. § 133.36 53 Pa. Cons. Stat. Ann. § 11701.261 R.I. Gen. Laws §45-9-7 3 States with limited authorization  Colorado has enacted legislation specifically authorizing its beleaguered special taxing districts to

file a petition under Chapter 9. Section 32-1-1403 of the Colorado revised statutes states that “any insolvent taxing district is hereby authorized to file a petition authorized by federal bankruptcy law and to take any and all action necessary or proper to carry out the plan filed with said petition…” (CRS § 37-32-102 (Drainage & Irrigation District))

 Oregon permits Irrigation and Drainage Districts to file (Or. Rev. Stat. § 548.705)  Illinois – specific authorization solely for the Illinois Power Agency (20 Ill Comp. Stat. Ann.

3855/1-20(b)(15)). The Local Government Financing and Supervision Act permits that commission to recommend that the Legislature authorize a filing but it is not specific authorization (20 Ill. Comp. Stat. Ann. 320/9(b)(4))

2 States prohibit filing but one has an Exception  Iowa generally prohibits filing Chapter 9 (Ia. Code Ann. § 76.16) but allows filing for insolvency

caused by debt involuntarily incurred not covered by insurance proceeds (Ia. Code Ann. § 76.16A)  Georgia prohibits the filing of Chapter 9 Bankruptcy (Ga. Code Ann. § 36-80-5)

12 States that conditionally authorize municipal bankruptcies:

The 21 Remaining States are either unclear or do not have specific authorization. AK, DE, HI, IN, KS, ME, MD, MA, MS, NE, NH, NM, ND, SD, TN, UT, VA, VT, WV, WI, WY.

The following are statutory provisions in which states have authorized Chapter 9 filings for certain governmental entities.


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C. Summary of Chapter 9 Priorities:

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TYPE OF CLAIM EXPLANATION

1. Obligations secured by a statutory lien to the extent of the Pledged Revenue collected.ab

Debt (Bonds, Trans, Rans) issued pursuant to statute that itself imposes a pledge. (There may be delay in payments due to automatic stay - unless stay is lifted - but ultimately will be paid.)

2. Obligations secured by Special Revenues (subject to necessary operating expenses of such project or system) to the extent of the Pledged Revenue collected.ab These obligations are often non-recourse and, in the event of default, the bondholders have no claim against non-pledged assets.

(Reaffirmed in Jefferson County Court Ruling.)

Special Revenue Bonds secured by any of the following: (A) receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide transportation, utility, or other services, including the proceeds of borrowings to finance the projects or systems; (B) special excise taxes imposed on particular activities or transactions; (C) incremental tax receipts from the benefited area in the case of tax-increment financing; (D) other revenues or receipts derived from particular functions of the debtor, whether or not the debtor has other functions; or (E) taxes specially levied to finance one or more projects or systems, excluding receipts from general property, sales, or income taxes (other than tax-increment financing) levied to finance the general purposes of the debtor.c

There should be no delay in payment since automatic stay is lifted under Section 922(d).

a Chapter 9 incorporates § 506(c) of the Bankruptcy Code which imposes a surcharge for preserving or disposing of collateral. Since the municipality cannot mortgage city hall or the police headquarters, municipal securities tend to be secured by a pledge of a revenue stream. Hence, it is seldom a surcharge will be imposed. But see numbers 3 and 4.

b Chapter 9 incorporates § 364(d) of the Bankruptcy Code, which permits a debtor to obtain post-petition credit secured by a senior or equal lien on property of the estate that is subject to a lien if the prior lien holder is adequately protected.

c A pledge of revenues that is not a Statutory Lien or Special Revenue Pledge may be attached as not being a valid continuing Post-Petition Lien under § 552 of the Bankruptcy Code.


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TYPE OF CLAIM EXPLANATION 3. Secured Lien based on Bond Resolution or contractual

provisions that does not meet test of Statutory Lien or Special Revenues to the extent perfected prepetition, subject to the value of prepetition property or proceeds thereof.c

Under language of Sections 522 and 958, liens on such collateral would not continue postpetition. After giving value to the prepetition lien on property or proceeds, there is an unsecured claim to the extent there is recourse to the municipality or Debtor. You may expect the creditor to argue that pursuant to Section 904, the Court cannot interfere with the property or revenues of the Debtor, and that includes the grant of security to such secured creditor.

4. Obligations secured by a municipal facility lease financing. Under Section 929 of the Bankruptcy Code, even if the transaction is styled as a municipal lease, a financing lease will be treated as long-term debt and secured to the extent of the value of the facility.

5. Administrative Expenses (which would include expenses incurred in connection with the Chapter 9 case itself).d Chapter 9 incorporates Section 507(a)(2) which, by its terms, provides a priority for administrative expenses allowed under Section 503(b). These would include the expenses of a committee or indenture trustee making a substantial contribution in a Chapter 9 case.

Pursuant to Section 943, all amounts must be disclosed and be reasonable for a Plan of Adjustment to be confirmed.

d These expenses strictly relate to the costs of the bankruptcy. Because the bankruptcy court cannot interfere with the government and affairs of the municipality, general operating expenses of the municipality are not within the control of the court, are not discharged and will remain liabilities of the municipality after the confirmation of a plan or dismissal of the case .


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TYPE OF CLAIM EXPLANATION 6. Unsecured Debt includes:

A. Senior Unsecured Claims with benefit of subordination paid to the extent of available funds (without any obligation to raise taxes) which include any of B, C, D, or E below.

B. General Obligation Bonds. Secured by the “full faith and credit” of the issuing municipality. Postpetition, a court may treat general obligation bonds without a statutory lien or Special Revenues pledge as unsecured debt and order a restructuring of the bonds. Payment on the bonds during the bankruptcy proceeding likely will cease.

C. Trade. Vendors, suppliers, contracting parties for goods or services. Payment will likely cease for prepetition goods or services.e

D. Obligations for Accrued but Unpaid Prepetition Wages and Pensions and other Employee Benefits.

These do not enjoy any priority, unlike in a Chapter 11.f

E. Unsecured portion of secured indebtedness.

F. Subordinated Unsecured Claims. Any debt subordinated by statue or by contract to other debt would be appropriately subordinated and paid only to the extent senior claims are paid in full. Senior debt would receive pro rata distribution (taking unsecured claim and subordinated claim in aggregate) attributable to subordinated debt until paid.

e Section 503(b)(9) provides for a priority claim to be paid on confirmation of a plan for the value of goods provided prepetition within 20 days of the petition date. f Chapter 9 does not incorporate § 1113 of the Bankruptcy Code, which imposes special provisions for the rejection of collative bargaining agreements (making

the standard less restrictive, i.e., “impairs ability to rehabilitate”) or §§ 507(a)(4) and (5), which give a priority (before payment of unsecured claims) to wages, salaries, commissions, vacation, severance, sick leave or contribution to pension plans of currently $11,725 per employee.


III. Historical Question of Political Risk in Times of Austerity

A. Traditionally causes of municipal Bond Defaults in the USA have been linked to inability to pay rather than unwillingness to pay or political risks: –  Economic Depression. –  Non Essential Services. –  Feasibility of Projects and Industries. –  Fraud. –  Mismanagement. –  Natural and Man Made Disasters.

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B. Current Potential Causes of Municipal Default. Generally, 75% of all municipal bond defaults have occurred in bonds issued by municipalities to finance revenue producing enterprises (i.e., highways, bridges, utilities, swimming pools, harbors, etc.). General Obligation Bonds have been 25% or less of defaults. There are many causes of municipal default. A number of factors, while they do not in and of themselves necessarily cause default, contribute to restricted cash flow which brings about an inability to meet scheduled debt service payments.

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III. Historical Question of Political Risk in Times of Austerity (cont’d)

–  Unaffordable and Unsustainable Personnel Costs. (Vallejo, San Bernardino, Detroit)

–  Deferred Costs of Capital Improvements and Infrastructure Costs. (Detroit)

–  Recent and Unaddressed Natural Disasters of Manmade Disasters.

–  The Bursting of USA State and Local Government Debt Bubble. (Jefferson County)

–  Decline of Urban Areas. (Detroit) –  Proposition Thirteen Mentality – The Popularity of Tax Caps and

Limitations. (Stockton and San Bernardino)

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–  Lingering Legal Issues and Surprise Court Decisions. (Town of Mammoth Lakes and Boise, Idaho)

–  Off Balance Sheet Liabilities. (Underfunded Pension Obligations San Bernardino, Detroit)

–  Willingness to Pay vs. Ability to Pay – Willingness to pay traditionally has not been a problem but could be a growing problem. (Jefferson County, Orange County, etc.)

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C. Since the Depression of the 1930’s, States and Local Governments have diversified the source of tax revenues to reduce reliance on property taxes and to spread the burdens and reduce the risk of concentration.

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D. Changes in the source of state and local governments revenues (1922-2008). General State and Local Governments Revenues 1922-2008:

Totals and Percentage Distribution

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1922 1927 1932 1936 1940 1968 2008 Amount of Gen. Rev. (billions of dollars)

4.8 7.3 7.3 8.4 9.6 101.3 2425.8

Percent Distribution Property Tax 69.5 65.1 61.7 48.8 46.1 27.4 16.7 Sales Tax 3.2 6.5 10.3 17.7 20.6 22.6 18.5 Income Tax 2.1 2.2 2.1 3.2 4.0 9.7 14.8 Other Tax 9.2 10.0 10.6 10.2 10.6 7.0 4.5 Misc. Rev. 13.7 14.7 12.0 8.9 8.9 16.3 25.7

Federal Aid 2.3 1.6 3.2 11.3 9.8 17.0 19.8 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Bureau of the Census – John Petersen “Municipal Defaults Eighty Years Makes a Big Difference 5/21/11” p. 9 George Mason University


–  Property, income and sales taxes made up over 70% of state and local governments revenues in 1922-1940 but only 50% of state and local governments revenue by 2008. More diverse and varied tax base in 2008 with more federal assistance.

–  Property taxes which made up over 60% of the revenues of state and local governments between 1922-1932 was only 16.7% of revenue by 2008 with increases in sale, income other, miscellaneous and federal aid making up the difference.

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E. We presently are recovering from a significant economic downturn: –  With unemployment hovering at 7-8% or more for many months,

state and local governments will feel the effects of the following:   Lower Sales Tax Collection.   Lower Real Estate Tax Collection.   Lower Personal Income Tax Collection.

–  We all have seen this before and, in the past, issuances of state and local government debt financing have helped stimulate increased employment and economic growth.

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F. Remember the Industrial Revenue Bonds, Recovery Zone Economic Development Bonds and other forms of financing and all of their efforts to increase business opportunities on the state and local level have successfully led to past recoveries. Other similarly related state and local government financing may this time be just what is necessary to encourage economic growth and job creation.

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G. Historically, government finance officers did anything they could to avoid default due to the essential need of any government of size to access the municipal market to cover financing of infrastructure and essential services at a low cost:

Municipalities and states fear default would lead either to limited or no access to the Municipal Bond Market or significant increase in the cost of borrowing (increased interest costs). This would limit or deprive states or municipalities of their present ability to decide locally what infrastructure improvement or what essential services they will finance and to finance such themselves rather than to obtain the consent or approval of a higher government who has the ability to obtain financing and possibly a different agenda.

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H. Our states enjoy a favorable GDP and Debt to GDP and Debt to Revenue Ratios compared to other Sovereigns on a global basis. For example: –  China has:

  31 provinces and regional governments.   391 cities.   2,778 counties.   33,000 townships.

–  The combined debt of these local governments is approximately $3 trillion or 36% of China’s GDP (2012) (China National Audit Office).

–  99 cities, 195 counties and 3,465 townships in China had direct debt 2013 exceeding 100% of their respective annual economic output (GDP).

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–  The USA has:   50 states.   3,031 counties.   19,522 municipalities.   16,364 townships.   37,203 special districts.   12,884 independent school districts.

–  The combined debt of state and local governments is approximately $3 trillion (Federal Reserve Bank of St. Louis 2013) or 18.52% of the USA’s GDP.

–  The highest debt to GDP for any state and its local government is approximately 26% New York with the lowest being Wyoming at 5.25%. The percentage of debt to local GDP for large city issuers in the USA is less than 20% and in most instances less than 10%.

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Causes of Chapter 9 to be noted and financial condition of Issuers to be avoided:

A. Unaffordable and Unsustainable Personnel Costs. (Vallejo, San Bernardino, Detroit)

B. Deferred Costs of Capital Improvements and Infrastructure Costs. (Detroit and Central Falls)

C. The Bursting of the Local Government Debt Bubble. (Jefferson County and Detroit)

D. Decline of Urban Areas. (Detroit and Central Falls) E. Proposition Thirteen Mentality – The Popularity of Tax Caps

and Limitations. (Stockton and San Bernardino)

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IV. Causes of Recent Chapter 9 Bankruptcies to Be Avoided in Investing in General Obligation Debt

F. Lingering Legal Issues and Surprise Court Decisions. (Town of Mammoth Lakes and Boise, Idaho)

G. Off Balance Sheet Liabilities. (Underfunded Pension Obligations – Stockton, San Bernardino, Detroit)

H. Willingness to Pay vs. Ability to Pay – Willingness to pay traditionally has not been a problem but could be a growing problem. (Jefferson County, Orange County, etc.)

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IV. Causes of Recent Chapter 9 Bankruptcies to Be Avoided in Investing in General Obligation Debt (cont’d)

How have General Obligation treated in Chapter 9?

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TYPE OF BONDS/NOTES BANKRUPTCY EFFECTS

General Obligation Bonds Post-petition, a court may treat general obligation bonds without a statutory lien as unsecured debt and order a restructuring of the bonds. Payment on the bonds during the bankruptcy proceeding likely will cease. Pre-petition, general obligation bonds are backed by the unlimited taxing power of the municipality (its “full faith and credit”) and are historically subject to conditions such as voter authorization, limitations on particular purposes, or debt limitation to a percentage of assessed valuation on the power of municipal entities to incur such debts.

General Obligation Bonds plus Pledged Revenues

Assuming that the general obligation pledge is an actual pledge of revenue and to the extent that it may be classified as a Statutory Lien or Special Revenues, this secured issuance will be respected and unimpaired and paid during a Chapter 9 to the degree it is consistent and authorized under state law. A Pledge of Revenues that is not a Statutory Lien or Special Revenues may be attacked as not being a valid continuing Post-Petition Lien under Section 552 of the Bankruptcy Code. This position may be questioned under Section 904 of the Bankruptcy Code given the prohibition that the Court not interfere with the Government Affairs or Revenues of the Municipality. Also a state’s constitution or laws may mandate a higher priority of payment, a set aside of revenues or an appropriation that is required to pay general obligation bonds.

Special Revenue Bonds A pledge on special revenue bonds will survive a bankruptcy filing. Pre-petition, a special revenue bond is an obligation to repay solely and only from revenues of a municipal enterprise (net of necessary operating costs in the case of a gross revenue pledge) that are pledged to bondholders. Special revenues are intended to be unimpaired and to be paid timely during a Chapter 9. The contemplated remedy for default often focuses on a covenant to charge rates sufficient to amortize the debt. Defaulted bondholders are expected to seek mandamus in court to require the municipal borrower to raise its rates.

Revenues subject to Statutory Lien

Assuming the pledge is authorized under state law through a statutory lien, the Bankruptcy Court should respect that statutory lien. Thus, as long as the revenues are subject to a statutory lien, payments to the bondholders should be protected post-petition.

V. Chapter 9 – Treatment of General Obligation Bonds in Recent Cases

  Creditors are subject to automatic stay upon filing of Chapter 9 petition.

  Automatic stay prohibits collection efforts by creditors.   Automatic stay impacts holders of general obligation

bonds or unsecured debt greater then in Chapter 11 because municipalities are afforded great freedom in the use of revenues and assets to perform their governmental functions.

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V. Chapter 9 – Treatment of General Obligation Bonds in Recent Cases (cont’d)

  Bonds or obligations secured by special revenues are exempt from automatic stay (for a statutory lien a lift stay motion may have to be filed) but the tax revenue pledge to pay those bonds is not to be used for any other purpose or otherwise impaired.

  Bonds secured by statutory lien and special revenues are intended to have the lien as pledged tax revenue continue after the filing of a Chapter 9 unlike a corporate pre-petition lien on account receivables or inventory that is terminated as to property created after filing a Chapter 9.

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•  Special Revenue Bonds •  A pledge on special revenue bonds will survive a bankruptcy filing.

•  Revenues Subject to Statutory Lien

•  Assuming the pledge is authorized and created by state law (statutory lien), the bankruptcy court should respect that statutory lien. Thus, as long as the revenues are subject to a statutory lien, payments to the bondholders should be protected.

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•  General Obligation Bonds •  Post-petition, a court may treat general obligation bonds without a pledge of a statutory lien or special revenues as unsecured debt and order a restructuring of the bonds. Payment on the bonds during the bankruptcy proceeding likely will cease.

•  General Obligation Bonds Plus Pledged Revenues

•  Assuming that the general obligation pledge is an actual pledge of revenue and to the extent that it may be classified as a statutory lien or special revenues, this secured lien on the tax revenues will continue to the extent taxes are collected.

•  A contractual pledge of tax revenue provided for by the bond document that is not a statutory lien or special revenue will have any tax revenue collected before filing paid to the bondholders but after filing that lien is terminated.

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How have General Obligation Bonds been treated in recent Chapter 9?

Note: Section 552 of the Bankruptcy Code has been interpreted to date to terminate a contractual pledge or promise to pay future tax revenues to be levied and collected after filing may be limited to pre-petition tax revenues levies and not revenues levied and collected from levies after the petition date. Any attempt of a municipality to deprive a general obligation bond of tax payments created and that come into existence solely by (a) means of a state statute (“Statutory Lien”) or (b) that are constitutional or statutory mandated priority, set aside, or appropriation or (c) means that qualifies as Special Revenues will create a confirmation objection of failing to comply with state law.

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Bankruptcy Treatment Sierra King Health Care District

The unlimited ad valorem tax G.O. Bonds were paid in full and recognized to having a statutory lien and special revenues.

Jefferson County G.O. Warrants were basically paid in full and no objection by Holders.

Detroit Proposed treatment of LTGOs as unsecured debt and somewhat improved treatment for UTGOs but not treated as fully secured or unimpaired – obligations by Holders.


–  The Detroit UTGO Issue – The treatment proposed by the Emergency Financial Manager that unlimited tax general obligation (“UTGO”) bonds should be treated like unsecured debt even though there has been voter approval of additional tax revenue dedicated to payment of these bonds raises some fundamental government finance issues. What does it mean to have tax revenue approval by the voters and dedicated to pay the general obligation bonds? What does Article IX Section 25 of the Michigan Constitution mean that “The repayment of voter approved bonded indebtedness is guaranteed”? What consequences are there to the Municipal Bond Market if UTGO Bonds are ultimately treated as unsecured debt. Can the plan of debt adjustment be confirmed if it is not in compliance with state law?

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VI. Bondholder Rights and Remedies

A. The critical differences between Revenue Bonds and General Obligation Bonds, Lease Appropriation Bonds and Conduit Financings: –  Revenue Bonds are generally only payable from the Pledged

Revenue, Specific tax source or revenue related to the Municipal enterprise financed and no other recourse to the issuing Municipality.

–  General Obligation Bonds are backed by the full faith and credit of the Municipality and may also have a contractual or statutory pledge of revenue.

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VI. Bondholder Rights and Remedies (cont’d)

–  Upon default Bondholder may institute lawsuits requesting the debt be immediately paid or certain actions be taken by the Municipality or be required to specifically perform under the documents.

–  Municipal Lease or Appropriation Backed Bonds (Non-recourse to municipality’s full faith and credit but recourse to annual appropriation or leased property. Note: cannot legally bind successor legislature to appropriate funds).

–  Conduit Financing (Non-recourse to municipality, must be for a general public purpose and the credit support is the non-profit or corporate entity benefited).

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–  Upon default on Lease Appropriation Bonds the remedies are limited to those set forth in the documents and applicable law and generally limited to the municipality’s loss of use of the leased facility and ability to relet the facility. In Conduit Financing the remedies are generally limited to the not-for-profit or corporate entity benefitted without recourse to the municipality.

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B. Upon Default (breach of covenant or failure to make payment of principal or interest), Bondholder may institute a lawsuit for a money judgment, mandamus, specific performance, or equitable relief such as for injunction or an accounting or for foreclosure on collateral (if permitted) or other relief: –  Mandamus – all States would permit a bondholder upon default

to petition for mandamus that in essence requires a Municipal official to levy taxes to pay an obligation. The problem is constitutional and statutory debt limits and time, cost and delay.

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–  Receiver – 46 States and Puerto Rico permit bondholders to petition a Court to appoint a Receiver upon default especially in the case of a default on the Revenue Bond for financing of a Municipal Enterprise.

–  Accounting – At least 23 States and the District of Columbia and Puerto Rico allow for Bondholders or Representative to bring an action for an accounting to require the local government to account for how bond funds have been spent.

–  Foreclosure – At least 28 States permit some form of foreclosure on mortgaged or secured real property upon default on a financing of that facility or structure generally related to conduit financing.

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–  Injunction – At least 15 States permit bondholder to obtain some form of injunctive relief upon default to protect and preserve their rights and remedies.

–  Other Relief. –  (For more detail see Municipalities in Distress? Chapman and

Cutler LLP 2012 and Summary Chart – Appendix A.)

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VII. How to Determine If a General Obligation Bond Will Be Paid in a Chapter 9 Bankruptcy

A. The Perceived Strength of General Obligation Debt. Since the Late 1800’s, no state has defaulted on its General Obligation Debt (except Arkansas in 1933 which debt was promptly refinanced): –  What is a G.O.? A government in issuing General Obligation

Debt is perceived by the market as “pledging” its full faith and credit (taxing power) to the payment of that Debt. But the devil is in the details and wording of the authorizing legislation or resolution.

–  Are There Tax Limits? Most states have constitutional or statutory debt or tax limitations (see 50 State Survey in “Municipalities in Distress?”). Accordingly, some General Obligation Debt is limited by those restrictions.

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–  Are There No Tax Limits? Some states provide (generally with required voter approval) “unlimited” General Obligation Debt which has been authorized as not having any limitation on the tax pledge.

–  Specific Pledges and Statutory Liens. While General Obligation Debt may have the promise of the government to levy taxes sufficient to pay the obligations (its full faith and credit), there is a distinction between General Obligation Debt that has no specific pledge or dedication of a specific tax source for payment and General Obligation Debt that has a dedication by pledge (security interest) or statutory lien of a specific dedicated source of payment. General Obligation Bonds that have both the “full faith and credit taxing power of the government” and a specific pledge or statutory lien on a specific property or revenue source for payment of the debt are sometimes referred to as “double barrel” bonds.

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VII. How to Determine If a General Obligation Bond Will Be Paid in a Chapter 9 Bankruptcy (cont’d)

–  The Devil is in the Details and the Disclosure. Specific attention should be paid to whether there is a general statement that the government pledges its full faith and taxing power to pay the General Obligation Debt or whether there is specific language in the authorizing resolution or legislation that dedicates specific property, revenues or tax source for payment of the debt or a specific state statute that creates and grants, by its express provisions governing the issuance of such debt, a lien on property or revenues for the payment of the debt without any further action by the government. Full and accurate disclosure of this is key to understanding whether a G.O. debt has something more.

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–  G.O.s That Are Not G.O.s? If a state reserves to itself the full power to tax and the municipalities have no power to tax and the state must pass specific legislation authorizing that municipality to be able to levy any tax, can such a municipality in such a state be really recognized as capable of issuing General Obligation Debt? If the municipality cannot levy taxes on its own, and has no power to do so, what is the benefit of a promise to levy a tax if the municipality has no power to levy if the state does not so authorize (see Alabama where only the state can authorize the levy of a new tax)?

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B. State Constitution or Law Mandating Priorities, Set Asides, Appropriations and Statutory Liens for General Obligation Debt: –  Priorities. Some states set forth either in their constitution or law

that there is a specific priority for the payment of General Obligation Debt for the state or even a municipality’s general obligation bonds (see California — constitutional priority for the state’s G.O. Debt second only to education funding; Hawaii — first charge on state’s general fund; also Louisiana, Missouri, Tennessee, Texas and Wisconsin).

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–  Set Asides. Some states require a monthly or periodic set aside of revenues to assure payment of General Obligation Debt when it comes due. The Set Aside may be required by state constitution or statute. If there is a failure to follow the mandated Set Aside, the bondholders may choose to enforce the Set Aside of funds by mandamus or other judicial relief. (States with some form of Set Aside are: Illinois — monthly payments of 1/12th of principal coming due in next 12 months and 1/6th of interest coming due in next six months; Vermont from General Funds when debt become due; Minnesota; also Delaware, Georgia, Louisiana, Maine, Michigan, Mississippi, Montana, New York, Pennsylvania, Rhode Island and Virginia — if state fails to timely pay the General Obligation Debt.)

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–  Mandated Appropriations. Some states mandate that the state must appropriate sufficient revenues to pay General Obligation Debt or if the state lacks funds to pay General Obligation Debt when it becomes due the state must then so appropriate sufficient funds. (See I. Alaska, Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Maine, Maryland, Minnesota, Mississippi, Missouri, Nevada, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Utah and Wisconsin — to appropriate sufficient funds to pay debt when due; II. Iowa, Kansas and South Dakota — irrepealable tax to pay bond debt; and III. New Jersey, South Carolina and Washington — to appropriate if failure to pay general obligations when it comes due.

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–  Statutory Liens. Some states provide by statute that the state or local government, upon issuing debt pursuant to a specific state statute, automatically has a lien granted on specified property or tax revenue for the payment of the debt so incurred. As discussed in the Municipal Bankruptcy section, this statutory lien remains unaltered in a chapter 9 proceeding and there is a continuing right to be paid after the filing of a chapter 9. This was recognized in the Orange County Chapter 9 in 1994 and Sierra Kings Health Care District Chapter 9 in 2009 (relating to General Obligation Bonds). (There are 32 states with statutory lien provisions. See the 50 State Survey that follows and Municipalities in Distress?)

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–  Special Revenue Pledges. Every state provides for some form of special revenue bonds and, in certain cases, the special revenue pledge can be granted for General Obligation Debt. A special revenue pledge is one that promises to pay the debt from a pledge or dedication of revenues from a specific source or governmental enterprise, special excise taxes, incremental tax receipts for tax incremental financing, revenues derived from a particular governmental function, taxes levied to finance a project or system (except for general sales, property and income taxes levied for general purposes). As noted in the Municipal Bankruptcy section, a Special Revenue Pledge is to be unaltered by a chapter 9 Municipal Bankruptcy and the timely payment of the Pledged Revenues by the municipality is required by the Bankruptcy Code. Both the Sierra Kings Health Care District Chapter 9 (Eastern District of California) and the Jefferson County Chapter 9 (Northern District of Alabama) reaffirmed the unaltered status and timely payment of Special Revenue Pledges in a Chapter 9 proceeding.

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C. A 50 State Survey of Priorities, Required Set Asides and Appropriations, Statutory Liens and Special Revenue Pledges for General Obligation Debt: –  The Preliminary Results of a 50 State Survey. Chapman and

Cutler LLP is conducting a 50 State Survey of the Priorities, Required Set Asides and Appropriations for payment of General Obligation Debt, as well as the applicable Statutory Liens and Special Revenue Pledges. This is a preliminary report on the findings and is subject to further review and change as the study is completed. Attached as Appendix A is the Summary Chart for Municipalities in Distress that sets forth where states authorize a Chapter 9 filing, what overnight remedies and protections bondholders have upon default at which state authorize special

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revenues and statutory liens. Attached as Appendix B is a chart summarizing by state whether there is any provision in that state relating to priorities for payment or mandated set aside of revenues or appropriations of revenues for the payment of General Obligation Debt or whether there is permitted a statutory lien or special revenue pledge.

–  Details of Provisions for the Payment of General Obligation Bond Debt for Ten Major Bond-Issuing States. (See Appendix C)

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A. Authorized to File Chapter 9? Can the issuer file for Chapter 9, if not, then right to enforce obligation in state court by mandamus and other remedies without a required restructuring?

B. What Is Source of Payment? Is the general obligation debt a “naked” full faith and credit promise or does it have a pledge of special revenues or statutory lien pledging and dedicating a specific and adequate tax revenue source for payment.

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VIII. Checklist of Considerations in Evaluating Repayment of General Obligation Debt

C. Is There a Lack of Diversification of Tax Sources and Limits on Taxes that Could Realistically Be Triggered? Are sources of tax revenues too limited or are there tax limits and debt limits close to being triggered that may prevent the raising of taxes to pay the obligation?

D. Are There Required Priorities, Set Asides or Appropriations to Support Payment? Do state constitutions or statutes provide for a priority of payment for general obligation debt or mandatory set aside of revenues or appropriations for payment of the debt?

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VIII. Checklist of Considerations in Evaluating Repayment of General Obligation Debt (cont’d)

E. Are There Effective Remedies Available If There Is a Default? Do the state statutes and case law provide effective remedies and does state court effectively enforce them?

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VIII. Checklist of Considerations in Evaluating Repayment of General Obligation Debt (cont’d)

IX. Lessons Learned from Significant Chapter 9 Cases during 2012 and in 2013

A. Recent Chapter 9 Bankruptcy Use and Litigation has produced some developing precedents. –  City of Vallejo:

  Lessons Learned: –  Insolvency to Be Determined by Cash Flow Analysis. –  Rejection of Labor Agreement. –  Federal Law Preempts State Labor Law Requirements for

Determining Whether a Public Employee Labor Agreement May Be Rejected. Detroit will revisit this issue with the added issue of a Michigan constitutional provision prohibiting reduction.

–  Adverse Effect on Municipal Services. –  Payment of Special Revenue Debt.

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–  Settlement of Lease Appropriation Bonds. –  Chapter 9 is Very Expensive. –  Chapter 9 is Complicated and Time Consuming. –  Exit of Business Taxpayers During Bankruptcy. –  No Real Increase in Chapter 9 Filings. –  Created the Motivation for a “Neutral Evaluator.” –  Does Chapter 9 Guarantee Success Thereafter?

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IX. Lessons Learned from Significant Chapter 9 Cases during 2012 and in 2013 (cont’d)

–  Jefferson County, AL:   Legal Issues Raised:

–  Special Revenues Decision – Special Revenues are not to be impaired in Chapter 9, are as defined in the Indenture and the authorizing resolution and cannot be reduced or impaired by the municipality in Chapter 9. (While the case involved a dispute over the sufficiency of rates charged to sewer customers and the efficacy of the rate covenant and whether the pledge of Special Revenues can be valued. The issues were settled pursuant to the plan of adjustment.)

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–  Eligibility – Challenges to authorization to file under state law clarified by Bankruptcy Court and Alabama Supreme Court ruling. Compliance of the County with the Indenture Rate Covenants being sufficient to pay debt service and capital expenditure and operating expenses were litigated in the Trustee’s lift stay motion, but the issues were settled pursuant to the plan of adjustment.

–  Duration – Filed for Chapter 9 in November of 2011 and the plan of adjustment and the refinancing were consummated in December of 2013.

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  Additional Issues: –  G.O. Bonds If No Ability to Tax – If a municipality like Jefferson

County has no power to raise tax revenues unless the state creates the tax or authorizes a new tax or increase, then how can the municipality issue general obligation bonds based on the full faith and credit that does not include the ability by itself to raise new funds through taxes?

–  Consequences – Will General Obligation debt be well treated out of fear of the above question?

–  Effect of No Acceleration – What is the Trustee’s ability to unilaterally decide not to distribute to warrant holders net revenues received by the Trustee since it has not yet accelerated all of the Warrants?


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–  Refinancing – The risks and benefits of refinancing debt both in and outside of Chapter 9 proceedings and use of bankruptcy court to validate the new bond issue.

–  Was It Worth It – While Jefferson Count has confirmed a plan of debt adjustment, the question will remain was it worth the exercise and is Jefferson County better off for filing.

–  Level of Services – Even through Jefferson County has emerged from Chapter 9, during the course of the bankruptcy, public workers and services were drastically reduced because, prior to filing for Chapter 9, the State Supreme Court ruled the occupancy tax unconstitutional. That caused a $80 million reduction in revenues that has not been filled by the State and the County is powerless to pass a tax without State authorization under the State Constitution.


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  Lessons Learned from Jefferson County, AL: –  Refinancing cures all ills. –  Can a feasible plan be proposed? –  A municipality needs the power to legislate and levy needed

taxes. –  Special revenues are to be unimpaired by a Chapter 9 filing. –  Benefits of statutory lien and special revenue status. –  Also raise issue of general obligation debt, willingness and

ability to pay and role of state to provide general fund relief. –  Terms of the indenture defined and limited operating expenses

the pledge of revenues subject to. –  Role of the bankruptcy court in adjudicating inter-creditor

issues.


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–  Trustee declines to make interest payment despite available funds and seeks court declaration to resolve inter-creditor issues.

–  Plan developed based on consensus of major creditor groups helps disclosure statement and confirmation process.

–  Is Chapter 9 worth the cost, expense and stigma if essential governmental services are not maintained under the plan at an acceptable level and employees and services are eliminated and revenues are far less than before the filing.

–  While a plan of debt adjustment provides relief from current debt obligations, in the long term, a plan of recovery which reinvests in the municipality and stimulates economic development with the accompanying creation of jobs is more important to all parties.


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–  Used confirmation order to validate refinancing of sewer warrants and rate path set forth in the plan to be subject to the bankruptcy court’s continuing jurisdiction – does this raise states rights issues and stretch the bankruptcy court’s limited jurisdiction beyond its elastic limit?

–  Should there be a difference between feasibility to exit Chapter 9 and the long-term ability to provide essential governmental services and infrastructure at an acceptable level and will Jefferson County provide less governmental services after Chapter 9 than before without a fix to the $80 million budget hole caused by the occupancy tax being declared unconstitutional?


–  Stockton, CA:   Legal Issues Raised:

–  Eligibility – Growing trend of challenging the authorization to file but, unlike dismissal in Boise County, Idaho in 2011, court held Stockton’s filing was in good faith and it was insolvent.

–  Pension Priority – CalPERs with city support asserted a priority of pension payments under state law but both deny same priority to bonds and credit enhancers used to finance that obligation.

–  Impairment of Contract and the Bankruptcy Code – On a preliminary basis, the Stockton court has held that a State constitutional provision prohibiting the impairment of contracts is trumped by the Bankruptcy Clause of the U.S. Constitution and that retired city employees’ health benefits can be impaired. (No specific California provision directed to retiree benefits.)

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–  Settlement – The Court recently ruled in the Stockton case that Bankruptcy Rule 9019 does not apply to post-petition settlements made between creditors and Chapter 9 Debtors as municipalities (Section 904 of Bankruptcy Court imposes limitations on Court’s jurisdiction. No Bankruptcy Court jurisdiction over property, revenues, political or governmental powers or debtor’s use and enjoyment of income producing property. Can such agreement withstand the test of “fair and equitable” at the time of confirmation of a plan?

–  Consensual Plan – Stockton has filed a proposed plan that has the support of some of the major creditor constituents and will it follow Vallejo and Jefferson County as cases where ultimately the parties come together and solve their issues in a Plan of Debt Adjustment.

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  Lessons Learned from Stockton, CA: –  Neutral Evaluator did not result in out-of-court resolution. City

still filed. –  Objections by Bond Insurers that City ineligible to file Chapter 9

as it failed to negotiate prepetition in good faith and did not meet the definition of “insolvency” unsuccessful.

–  Largest unsecured creditor, CalPERs followed by trustee for pension obligation bonds and another trustee for three other sets of bondholders.

–  Bankruptcy Court holds that Rule 9019 does not apply to Chapter 9 debtors and debtor is free to make settlement payments to prepetition creditors during a Chapter 9 based upon Section 904 of the Bankruptcy Code.

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–  Although City negotiated deals with other unions over pension benefits, obligations to CalPERs remains essentially untouched in City plan.

–  Proposed plan sets up the controversy over giving a priority to pension funding over public debt even debt used to fund pension and the legal and practical basis for such priorities. Are the plan and pension payments sustainable and affordable, in the “best interest of creditors” consistent with state and bankruptcy law and feasible?

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–  San Bernardino Bankruptcy:   Legal Issues Raised:

–  Exception to Neutral Evaluator – Ability of municipalities to bypass neutral evaluator by claiming a “fiscal emergency” by adopting a resolution at a noticed public hearing that includes findings that financial state of the municipality jeopardizes the health, safety or well being of its residents absent bankruptcy protection and the municipality is or will not be able to meet its obligations within the next 60 days.

–  Pension Issues – CalPERs’ actions to seek permission to sue the City to force it to make pension payments post petition based on CalPERs’ state rights and argument that such action by CalPERs is contrary to the Supremacy Law and Federal Law pre-emption.

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–  Eligibility – CalPERs raised Chapter 9 eligibility of San Bernardino (eligibility appears to be the regular question raised by creditors in a Chapter 9).

–  Ruling – Court finally ruled in August of 2013 that San Bernardino was eligible to file for Chapter 9. CalPERs has appealed this ruling.

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  Lessons Learned from San Bernardino, CA: –  Neutral Evaluator bypassed because of “fiscal emergency.” –  City officials stopped paying into the state pension fund after

filing. –  CalPERs asserted City’s action violated state law protecting

pensions of public employees and requested the bankruptcy court for permission to sue the City to force it to make pension payments.

–  Bond Insurers countered with reference to the Supremacy Clause and the argument that the Bankruptcy Code preempts and supersedes inconsistent state law.

–  Bankruptcy Court denies CalPERs request to lift the automatic stay to sue City in California state court.

–  Chapter 9 eligibility issue raised by CalPERs decided by the Bankruptcy Court in favor of City. This ruling is now on appeal.

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–  Central Falls, RI Bankruptcy:   Legal Issues Raised:

–  Use of Receiver – City’s attempt pre-filing to have a court appoint a receiver was a shock to the market.

–  Public Debt First Lien – Statutory lien for all public debt of municipalities to prevent negative contagion.

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  Lessons Learned from Central Falls, RI: –  Expedited Process – Confirmed plan and exited Chapter 9

proceedings in 15 month – fastest Chapter 9 for a city, town and county in last 10 years.

–  Can the Municipality Survive Without Pension Adjustments – Issues related to state pension funds and ability to adjust municipal obligations.

–  Removing the Hostage – The first lien position of public debt-focused the remaining parties on what is sustainable and affordable.

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–  Detroit, MI:   Need For Help Early– Major cities in distress need help from

the state and financial problems of major cities only get worse if not addressed.

  Labor Costs – Labor costs must be sustainable and affordable and not interfere with providing essential governmental services.

  Should the Municipality Shoulder All the Costs – The need to transfer burdensome costs of certain services to other governmental bodies.

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  Buy-Ins – Local “buy-in” is necessary for a successful recovery plan.

–  Hot Issues – Bankruptcy filing of Detroit raised eligibility and federal bankruptcy court jurisdiction issues: Does the “do not impair or diminish” provision of Michigan Constitution for public workers’ pensions create an obstacle to eligibility to file or confirmation of a plan? (On September 24, 2013, the Puerto Rico Supreme Court ruled pensions can be impaired for a higher public purpose. On December 3, 2013, the Detroit Bankruptcy Court ruled pension obligations can be impaired if done so in a fair and equitable manner and it will not violate state constitution provisions.)

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  The Bankruptcy Court has ruled as to eligibility: –  Chapter 9 is constitutional. –  Pension benefits can be adjusted in Chapter 9 like any other

debt obligation regardless of any state constitutional provision. –  The Emergency Manager Law is constitutional. –  Detroit is insolvent. –  While pension benefits can be cut, the plan must be fair and

equitable. –  While the City did not negotiate in good faith with labor prior to

the filing, negotiations were impracticable.

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  The creative use of donations in Chapter 9: –  A group of philanthropic organizations, with the help of the

court-appointed mediator, developed a proposal to provide at least $330 million in donations to be directed to unfunded pension obligations provided that the Detroit Institute of Arts remains open and operating. Likewise, the Michigan Governor and Legislature would grant (gift) funds in the amount of $350 million to fund unpaid pension obligations provided that the Detroit Institute of Arts stays open. This creative effort demonstrates what can be done by the local community and the state to assist in the plan of adjustment process. However, other unsecured creditors of similar priority may be able to argue that they should receive equal or comparable benefit in the plan of debt adjustment in order for the plan to be fair and equitable.

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  Questionable safe-harbor for swaps in Chapter 9: –  The Detroit Bankruptcy Court has ruled that, while the

Bankruptcy Code intended to provide a safe harbor for security agreements like swaps and permit the liquidation of and collection of collateral in a Chapter 9, there are occasions when such protection will not be provided at the discretion of the court. Casino tax revenues secured the swaps but issues were raised as to the validity of the swaps under state law and the use of casino tax revenues to secure the swaps. Accordingly, the Bankruptcy Court refused to approve the settlement negotiated by the Emergency Manager and recommended by the Court-appointed Mediator who had improved the settlement by $100 million. The Bankruptcy Court found that arguments related to the invalidity of the swaps too compelling to be ignored and refused to approve the settlement.

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  The Limited Jurisdiction of a Bankruptcy Court in Chapter 9 – The Detroit case will further explore the jurisdictional limitations on a bankruptcy court. Generally, a bankruptcy court in a Chapter 9 proceeding cannot without the consent of the municipality interfere with the property, revenues, power or governmental affairs of the municipality. In response to the request for the appointment of a creditors committee to value the art, at the expense of the City, which was approved by the City, the Bankruptcy Court found it had no jurisdiction to approve the use of revenues of the City for such purpose without the consent of the City.

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  UTGO Issues – The treatment proposed by the Emergency Financial Manager that unlimited tax general obligation (“UTGO”) bonds should be treated like unsecured debt even though there has been voter approval of additional tax revenue dedicated to payment of these bonds raises some fundamental government finance issues. What does it mean to have tax revenue approval by the voters dedicated to pay the general obligation bonds? What does Article IX Section 25 of the Michigan Constitution mean that “The repayment of voter approved bonded indebtedness is guaranteed”? What consequences are there to the Municipal Bond Market if UTGO Bonds are ultimately treated as unsecured debt.

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  Affordable Pension Obligations – –  Can Detroit survive if unfunded pension obligations are larger than

its ability to pay without crowding out essential governmental services and infrastructure?

–  Should Detroit even pay more on pension obligations than that which is determined to be sustainable and affordable after funding necessary infrastructure and essential governmental services?

–  Can there really be an “impairment or diminishment” if pension obligations if a municipality pays all it can without sacrificing funding for essential services and infrastructure?

–  The bankruptcy court ruled that pension obligation can be impaired in a Chapter 9 proceeding and that impairment, so long as it is fair and equitable, does not violate the Constitutional prohibition of not “impairing or diminishing” pensions. This decision is on appeal to the Sixth Circuit.

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  DIP Financing – –  What is the role of the bankruptcy court in approving DIP

financing even after the city council has voted against it? Do you need local by-in for a recovery plan and any financing of it?

–  The Bankruptcy Court denied the proposed DIP financing secured in part by the casino tax revenues subject to the alleged lien of the swaps. In refusing to approve the swap settlement, the Bankruptcy Court at least temporarily delayed any DIP financing that used casino tax revenues. The Court stressed the importance of the need for any settlement or financing to benefit and sustain the viability of Detroit before it will be approved.

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X. Conclusion

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  While Political Risk so far for the Municipal Bond Market has not been a real concern, hard times make hard cases. The best protection against being subject to the unwillingness to pay or Political Risk is to follow the best practice of oversight and assistance by various States and reduce or eliminate the opportunity for there to be any question as to whether a payment is to be made or the need for a Chapter 9 proceeding for municipal debt adjustment to be filed. The state and local governments can provide additional assurance by: (A) Not authorizing the use of Chapter 9 bankruptcy.

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(B) Hard wiring payment of the bonds with statutory liens or special revenues that are dedicated to be used only to pay that bond or note.

(C) Providing in covenants and statutes that the collection of taxes must be paid to first to bonds and notes and sufficient taxes are required to be levied to pay such bonds and notes timely.

(D) Provide by statute or constitution provisions a requirement of a balanced budget with teeth for increase taxes or expense cuts if there are successive deficit budgets.

(E) Provide by state statute a first lien on all ad valorem taxes and revenues to ensure payment of municipal bonds and notes as Rhode Island has recently enacted.

X. Conclusion (cont’d)

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(F) Provide effective remedies and prompt judicial action to ensure payment of bonds or notes.

(G) Provide state supervision and oversight and adult supervision as well as early detection triggers for financial distressed municipalities.

(H) Provide the ability of the state to transfer or combine costly and currently unaffordable services from a distressed municipality to other government entities.

(I) Provide initial and secondary market disclosure of the ongoing financial status of the municipality and any financial distress as well as whether (A)-(H) above have been provided as protection.


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(J) Require recovery plan for distressed municipalities that mandate affordable and sustainable budgets with appropriate funding of essential governmental services and infrastructure at acceptable levels to foster economic development and create new jobs.

(K) Require municipalities with significant public pension underfunding to develop a recovery plan and consider whether municipal assets can be monetized so that intrinsic value is used to support pension underfunding to avoid GASB 67 and 68 issues while pension benefit funding or adjustment are pursued as part of the recovery plan. From the investor side is evaluating general obligation debt what you should consider?


(L) Checklist of Considerations in Evaluating Repayment of General Obligation Debt:   Authorized to File Chapter 9? Can the issuer file for

Chapter 9, if not, then right to enforce obligation in state court by mandamus and other remedies without a required restructuring?

  What Is Source of Payment? Is the general obligation debt a “naked” full faith and credit promise or does it have a pledge of special revenues or statutory lien pledging and dedicating a specific and adequate tax revenue source for payment.

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  Is There a Lack of Diversification of Tax Sources and Limits on Taxes that Could Realistically Be Triggered? Are sources of tax revenues too limited or are there tax limits and debt limits close to being triggered that may prevent the raising of taxes to pay the obligation?

  Are There Required Priorities, Set Asides or Appropriations to Support Payment? Do state constitutions or statutes provide for a priority of payment for general obligation debt or mandatory set aside of revenues or appropriations for payment of the debt?

  Are There Effective Remedies Available If There Is a Default? Do the state statutes and case law provide effective remedies and does state court effectively enforce them?

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Chapman and Cutler LLP has published a book entitled Municipalities in Distress?, which is an analysis of state laws dealing with financial emergencies of local governments (50-State Survey of State Law providing (1) oversight, supervision or assistance to financially distressed municipalities, (2) rights and remedies provided by states to investors in financially distressed local government debt and (3) state authorization of municipalities to file Chapter 9 bankruptcy). This Survey is being updated and preliminary results may be briefly summarized by the following chart:

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Appendix A: Municipalities in Distress?

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Appendix A: Municipalities in Distress? (cont’d)

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  Virtually all States have some statutes providing for: –  Ability to refund. (All states have some provision for refunding

bonds.) –  Debt limitations (at least 47 states have some form of debt

limitation). –  Appointment of receivers (at least 46 states). –  Mandamus or remedies upon default to require payment of debt or

levying taxes. (All 50 states have mandamus and at least 28 states have some provision for foreclosure, 23 states provide for a statutory right to such an accounting and at least 25 states have other remedies.)

–  Statutory liens or special revenues. (All 50 states have some form of special revenue and at least 30 states have statutory liens.)


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  Active financial supervision or financial review (over half of the States):

At least 2 – Debt Advisory Commission. At least 8 – Statutes providing for debt compromise or

adjustment process and intercepts for payment. At least 15 – Active technical assistance, grants, loans, budget

review. At least 25 – Financial control boards, refinance authorities and

active outside supervision and review or other default resolution remedies.

Virtually every state has some form of limitation on taxes or debt or a combination of both.


____________________ N - No Provision in State Constitution or Law. P - State Constitution or Law provides a priority in payment for Specific General Obligation Bonds. SA - State Constitution or Law provides for a Set Aside of Revenues or Funds for payment of General Obligation Bonds as they become due:

SA-1 - Set Aside before payment is due SA-2 - Set Aside or transfer of funds when payment is due SA-3 - Set Aside or transfer of funds after failure to make payment when due

A - State Constitution or Law requiring appropriations sufficient to pay general obligation debt when it comes due: A-1 - Sufficient to pay General Obligation as it becomes due A-2 - Irrepealable or irrevocable and sufficient to pay debt A-3 - If insufficient funds to pay debt when it becomes due then continuing appropriation

SL - State Law providing for statutory lien created by the government issuing debt under that statute without any further actions by the government whereby there is a dedication or pledging of specific tax revenues or funds to payment of Specified General Obligation Debt. See “Municipalities in Distress?” for more detail.

SR - State Law providing for Special Revenue Bonds which may include General Obligation Debt. See “Municipalities in Distress?” for more detail. * State Constitutions and Laws vary, and this is a general review and classification. The specific provisions of State Constitutions or Laws should be reviewed

to determine whether they are applicable to any Specific General Obligation Debt.

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50 State Survey of General Obligation Debt, Constitutional or Statutory Priorities, Assurances and Liens*

Name of State (including D.C. and

Puerto Rico)

Constitutional or Statutory Priorities or Set Asides for

Payment of Specified General Obligation Bonds

Constitutional or Statutory Required Appropriation

Sufficient for the Payment of General Obligation Debt

Currently Due from Available Revenues or Funds

Statutory Lien for Payment of

Specified General Obligation Bonds

Special Revenue Pledge Permitted for Payment of

Specified Bond Debt

Alabama N - G.O. debt requires constitutional amendment

N SL SR

Alaska N A-1 SL SR

Appendix B: How to Determine If a General Obligation Bond Is Really a “General Obligation” Bond







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Puerto Rico)









Specified Bond Debt

Arizona N A-1 N SR

Arkansas N A-1 SL SR

California P - second only to education funding

N SL SR

Appendix B: How to Determine If a General Obligation Bond Is Really a “General Obligation” Bond (cont’d)







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Puerto Rico)









Specified Bond Debt

Colorado N - State constitution forbids General Obligation Debt

N SL SR

Connecticut N A-1 SL SR

Delaware SA-3 A-1 N SR








109


Puerto Rico)









Specified Bond Debt

District of Columbia N A-1 N SR

Florida N A-1 SL SR

Georgia SA-3 A-1 N SR








110


Puerto Rico)









Specified Bond Debt

Hawaii P - First charge on general fund N N SR

Idaho N A-1 SL SR

Illinois SA-1 A-1 SL SR








111


Puerto Rico)









Specified Bond Debt

Indiana N N SL SR

Iowa N A-2 SL SR

Kansas N A-2 SL SR








112


Puerto Rico)









Specified Bond Debt

Kentucky N N SL SR

Louisiana P + SA-3 - first priority of state funds

N SL SR

Maine SA-3 - Treasurer to set aside first revenues

A-1 SL SR








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Puerto Rico)









Specified Bond Debt

Maryland N A-1 SL SR

Massachusetts N N SL SR

Michigan SA-3 N SL SR








114


Puerto Rico)









Specified Bond Debt

Minnesota SA-1 A-1 N SR

Mississippi SA-3 A-1 SL SR

Missouri P A-1 N SR








115


Puerto Rico)









Specified Bond Debt

Montana SA-3 N N SR

Nebraska N N N SR

Nevada N A-1 Sl SR








116


Puerto Rico)









Specified Bond Debt

New Hampshire N N N SR

New Jersey N A-3 N SR

New Mexico N N N SR








117


Puerto Rico)









Specified Bond Debt

New York SA-3 N SL SR

New Carolina N N SL SR

North Dakota N A-1 SL SR








118


Puerto Rico)









Specified Bond Debt

Ohio N A-1 SL SR

Oklahoma N A-1 N SR

Oregon N A-1 N SR








119


Puerto Rico)









Specified Bond Debt

Pennsylvania SA-3 A-1 N SR

Puerto Rico SA-3 N N SR

Rhode Island SA-3** N SL** SR








120


Puerto Rico)









Specified Bond Debt

South Carolina N A-1 SL SR

South Dakota N A-2 SL SR

Tennessee P - Pledge of certain taxes A-1 - Automatic appropriation SL SR








121


Puerto Rico)









Specified Bond Debt

Texas P - First lien on general funds not constitutionally dedicated

N N SR

Utah N A-1 N SR

Vermont SA-2 N SL SR








122


Puerto Rico)









Specified Bond Debt

Virginia SA-3 N SL SR

Washington N A-1 N SR

West Virginia N N SL SR








123


Puerto Rico)









Specified Bond Debt

Wisconsin P - First lien on all revenue to pay public debt

A-1 N SR

Wyoming N N N SR


Appendix C:

  Provisions for Payment of General Obligation Bond Debt for Ten Major Bond-Issuing States

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STATE TREATMENT OF STATE GENERAL OBLIGATION BOND DEBT AND TAXING AUTHORITY LIMITATION

California Treatment of State General Obligation Bond Debt Under the California Constitution, general obligation bonds are to receive “priority payment” from the California General Fund, second only to funding for education. In addition, the appropriation to pay debt service on general obligation bonds that have been approved by the voters cannot be repealed until the principal and interest on the bonds has been fully paid.i

Taxing Authority Limitations Although state general obligation bonds are to receive “priority payment,” the California Constitution limits ad valorem tax rates. Specifically, the maximum amount of any ad valorem tax on real property in California may not exceed 1 percent of the full cash value of the property. Further, the value of the property is set at the 1975-76 market value, unless the property is sold or significantly modified. The limitation does not apply to ad valorem or special assessments to pay interest and redemption charges on indebtedness arising before July 1, 1978 and for any bonded indebtedness incurred for the acquisition or improvement of real property approved after July 1, 1978, so long as two-thirds of voters approve the proposition.ii

Appendix C:

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Texas Treatment of State General Obligation Bond Debt In Texas, general obligation debt has a priority claim on the state’s general fund revenues not constitutionally dedicated for other purposes, including education and state highways.iii

Taxing Authority Limitations The Texas Constitution disallows ad valorem property taxes imposed at the state level. In addition, should the Texas legislature chose to impose an personal income tax or increase such a tax, the law must be approved by a majority of registered voters voting in a statewide referendum. The referendum must specify the tax rate. At the local level, local governments must rollback property taxes after a reassessment to yield revenue increases of no more than 8 percent, excluding revenues for debt service. If revenue growth is greater than 8 percent, voters may rollback rates to result in an 8 percent increase in revenues.iv

Appendix C:

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New York Treatment of State General Obligation Bond Debt In New York, if the state fails to pay its general obligation bond debt, the state comptroller is required to set aside an amount sufficient from the first revenues received after the failure to pay debt service.v

Taxing Authority Limitations New York does not appear to have any specific taxing limitations at the state level. Although New York law contains no tax limits at the state level, New York law limits ad valorem property tax increases at the local level, with some exceptions.vi

Appendix C:

127


Florida Treatment of State General Obligation Bond Debt Although Florida has no legal priority of debt service over other payments, the Florida Constitution requires the legislature to appropriate funds sufficient to pay the state’s debt service on its general obligation bonds as the same shall become due. The Florida statutes, however, require that appropriations, other than from the general revenue fund, made for school purposes under any statute or law, shall be payable out of the first available funds, after payment of salaries of public officers and other current expenses.vii

Taxing Authority Limitations The Florida Constitution prohibits the levying of state ad valorem taxes on real estate or tangible personal property. The Florida Constitution provides, however, that provisions must be made by law to raise sufficient revenue to defray the expenses of the state in each fiscal period. Such revenues, however, must be limited to the state revenues allowed for the previous fiscal year, plus an adjustment for growth. State revenues may be increased by a two-thirds vote of the legislature. “State revenue,” however, does not include revenue necessary to pay the bonded indebtedness of the state.

At the local level, increases in assessed values for homesteaded properties are limited to the lower of 3 percent or the rate of inflation based on the Consumer Price Index. For all levies other than school district levies, however, assessments on real property not subject to the 3 percent homestead cap may change no more than 10 percent from the prior year.viii

Appendix C:

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Illinois Treatment of State General Obligation Bond Debt The Illinois General Obligation Bond Act mandates that the state legislature annually appropriate an amount sufficient to cover the state’s service of its general obligation debt each year and set aside monthly 1/12th of the next 12 months of principal amortization and 1/6th of the next six months of interest, thus making the state’s debt service irrevocable and continuing.ix

Taxing Authority Limitations Illinois does not have any specific tax limitation at the state level, but taxes imposed on corporations shall not exceed the rate imposed on individuals by a ratio of more than 8 to 5. At the local level, in certain taxing districts, property taxes may not be increased by more than the lesser of 5 percent or the increase in the national Consumer Price Index for the year preceding the levy year; but this rate may be increased by a majority of voters voting in a taxing district.x

Appendix C:

129


Pennsylvania Treatment of State General Obligation Bond Debt Under Pennsylvania law, if the legislature fails to appropriate sufficient funds to cover the state’s general obligation debt on a timely basis, the state treasurer is required to take from the first revenues received thereafter applicable to the appropriate fund a sum sufficient to pay the principal and interest of the debt.xi

Taxing Authority Limitations Pennsylvania law does not appear to have any ad valorem tax limitations at the state level. At the local level, limitations may exist depending on the type of local government.

Ohio Treatment of State General Obligation Bond Debt In Ohio, various constitutional provisions govern the issuance of general obligation debt, many requiring that sufficient appropriations be provided to pay for the debt service of the particular bond issuance, without need for further appropriation by the state legislature.xii

Taxing Authority Limitations The Ohio Constitution prohibits property taxes in excess of one percent of a property’s true value in money for all state and local purposes. Laws, however, may authorize additional taxes outside of this limitation, if either approved by a majority of voters in the taxing district voting or when provided by a municipal corporation’s charter.xiii

Appendix C:

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Michigan Treatment of State General Obligation Bond Debt In Michigan, if the state fails to pay its general obligation bond debt, the state treasurer is required to pay the debt from the first state money and revenue received in that year or subsequent fiscal years, other than from retirement funds, trust and agency funds, bond proceeds funds, debt service funds, restricted gifts and grants, or revenue restricted by the state’s constitution for other purposes.xiv

Taxing Authority Limitations The Michigan Constitution limits general ad valorem taxes imposed on real and tangible personal property for all purposes in any one year to not exceed 15 mills on each dollar of assessed value of the property. The limitation may be increased to an aggregate not to exceed 50 mills per each dollar of valuation for a period not to exceed 20 years, if approved by a majority of voters voting. These provisions, however, do not apply to taxes imposed for the payment of principal and interest on bonds approved by voters.xv

Appendix C:

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New Jersey Treatment of State General Obligation Bond Debt In New Jersey, the guarantee of payment of general obligation debt is fixed by the provision authorizing the issuance of such debt. Although each individual provision should be reviewed before assessing the pledge of payment of a particular general obligation bonds, New Jersey’s laws generally require that if appropriations for general obligation bonds are insufficient or the funds are not available, the State Treasurer is required to collect an additional annual tax on real and personal property in an amount sufficient to cover the payment of said bonds.xvi

Taxing Authority Limitations New Jersey law places no limits on the state’s ability to tax. Although New Jersey law contains no tax limits at the state level, New Jersey law limits ad valorem property tax increases at the local level, with certain exceptions.xvii

Appendix C: ____________________ i CAL. CONST. art. XVI, §§ 1, 8. ii CAL. CONST. art XIIIA, §§ 1-2. iii See, e.g., TEX. CONST. art. VII, § 17 (appropriating out of first money coming into the state treasury not otherwise

appropriated by the constitution, $100 million for eligible colleges and universities for certain purposes); TEX. CONST. art. III, § 49-b (if funds in Veterans’ Land Fund, Veterans’ Housing Assistance Fund, or the Veterans’ Housing Assistance Fund II insufficient to pay principal and interest on general obligation bonds benefiting those funds in a fiscal year, there is appropriated out of the first money coming into the treasury, not otherwise appropriated, an amount sufficient to pay the principal and interest on the bonds maturing during that fiscal year); TEX. CONST. art. III, § 49-c (Texas water development bonds paid out of first moneys coming into treasury in each fiscal year, not otherwise appropriated by Texas constitution); TEX. CONST. art. III, § 49-d-8 (if funds insufficient, Texas Water Development Fund II bonds paid out of first moneys coming into treasury in each fiscal year, not otherwise appropriated by Texas constitution); TEX. CONST. art. III, § 49-e (Texas Park Development Fund bonds paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); TEX. CONST. art. III, § 49-f (bonds to fund financial assistance to purchase farms and ranch land paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); TEX. CONST. art. III, § 49-h (bonds issued for facilities of correctional institutions, statewide law enforcement facilities, and mental health and mental retardation institutions paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); TEX. CONST. art. III, § 49-i (bonds issued by Texas agricultural fund paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); TEX. CONST. art. III, § 49-n (highway tax and revenue anticipation notes dedication and appropriation of revenue may not be modified so as to (continues footnote on next page)

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Appendix C: ____________________ (continued from previous footnote)

impair outstanding bonds secured by revenue pledge); TEX. CONST. art. III, § 49-p (bonds issued for highway improvement projects paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution) TEX. CONST. art. III, § 50b-6 (bonds issued to fund additional student loans paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); TEX. CONST. art. III, § 50-c (bonds issued for farm and ranch loans paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); TEX. CONST. art. III, § 50-d (bonds issued for agricultural water conservation bonds paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); TEX. CONST. art. III, § 50-f (issuance of general obligation bonds for construction and repair projects and purchase of equipment paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution); and TEX. CONST. art. III, § 50-g (general obligation bonds issued for maintenance, improvement, repair or construction projects paid out of first moneys coming into the treasury in each fiscal year, not otherwise appropriated under the constitution).

Because the Texas constitution provides individual authority for general obligation bonds for individual specific purposes, the underlying law authorizing a particular general obligation bond issuance should be reviewed before assessing the guarantees the state has made on the bonds at issue.

iv TEX CONST. art. VIII, § 1-e (no state ad valorem tax) & § 24 (governing implementation of personal income tax). See also TEX. PROP. CODE §§ 26.01-26.15 (property tax appraisal provisions limiting increases to no more than 8 percent).

v N.Y. CONST. art. VII, § 16.

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Appendix C: ____________________ vi In June 2011, the New York governor signed into law a provision limiting local property tax increases outside of

New York City and certain other counties to 2 percent or the rate of inflation, whichever is less, but this amount does not include a capital tax levy. Local voters, however, may override the cap with a 60 percent vote on the budget for the local school board or relevant legislative body. The provision sunsets on June 16, 2016. N.Y. Ch. 97 of the Laws of 2011 (signed into law by governor on June 24, 2011).

vii FLA. CONST. art. VII, § 11; FLA. STAT. ANN. §§ 215.15-16 (schools). viii FLA. CONST. art. VII, § 1 (disallowing state ad valorem taxes, but requiring collection of sufficient revenues); FLA.

CONST. art. VII, § 4 (homestead assessments). ix 30 ILL. COMP. STAT. ANN. 330/14 and 330/15. x ILL. CONST. art. IX, § 3 (corporate tax limitation); 35 ILL. COMP. STAT. ANN. 200/18-185 et seq. (Property Tax

Extension Limitation Law). xi PA. CONST. art. VIII, § 7(d). xii See, e.g., OHIO CONST. art. VIII, § 21 (Parks, recreation, and natural resources project capital improvement

bonds); OHIO CONST. art. VIII, § 2h (state development bonds); OHIO CONST. art. VIII, § 2p (bond issuance for research and development of business and commerce, business site development, and infrastructure capital improvements); OHIO CONST. art. VIII, § 2k (local government public infrastructure capital improvement bonds); OHIO CONST. art. VIII, § 2n (facilities for system of common schools and facilities for state-supported and state-assisted institutions of higher education bonds); and OHIO CONST. art. VIII, § 2m (additional public infrastructure capital improvements; highway capital improvement bonds). (continues footnote on next page)

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Because the Ohio Constitution authorizes its general obligation bonds separately, the underlying authorizing provision for a particular general obligation bond issuance should be reviewed before determining the appropriations treatment of that issuance

xiii OHIO CONST. art. XII, § 2. xiv MICH. COMP. LAWS ANN. § 12.62. xv MICH. CONST. art. IX, § 6. xvi See, e.g., Clean Water Bonds Act of 1976, ch. 92, 1976 N.J. Laws 444; New Jersey Green Acres Bond Act of

1978, ch. 118, 1978 N.J. Laws 745; Energy Conservation Bond Act of 1980, ch. 68, 1980 N.J. Laws 458; Natural Resources Bond Act of 1980, ch. 70, 1980 N.J. Laws 475; Water Supply Bond Act of 1981, ch. 261, 1981 N.J. Laws 940; Hazard Discharge Bond Act, ch. 275, 1981 N.J. Laws 979; New Jersey Green Acres Bond Act of 1983, ch. 354, 1983 N.J. Laws 1499; Pinelands Infrastructure Trust Bond Act of 1985, ch. 302, 1985 N.J. Laws 1251; Resource Recovery and Solid Waste Disposal Facility Act of 1985, ch. 330, 1985 N.J. Laws 1380; Hazardous Discharge Bond Act of 1986, ch. 113, 1986 N.J. Laws 718; New Jersey Green Acres, Cultural Centers and Historic Preservation Bond Act of 1987, ch. 265, 1987 N.J. Laws 1365; Jobs, Education and Competitiveness Bond Act of 1988, ch. 78, 1988 N.J. Laws 623; New Jersey Bridge Rehabilitation and Improvement and Railroad Right-of-way Preservation Bond Act of 1989, ch. 180, 1989 N.J. Laws 998; Stormwater Management and Combined Sewer Overflow Abatement Bond Act of 1989, ch. 181, 1989 N.J. Laws 1015; Open Space Preservation Bond Act of 1989, ch. 183, 1989 N.J. Laws 1041; Public Purpose Buildings and Community-Based Facilities Construction Bond Act of 1989, ch. 184, 1989 N.J. Laws 1063; Green Acres, Clean (continues footnote on next page)

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Water, Farmland and Historic Preservation Bond Act of 1992, ch. 88, 1992 N.J. Laws 1992 869; Developmental Disabilities’ Waiting List Reduction and Human Services Facilities Construction Bond Act of 1994, ch. 108, 1994 N.J. Laws 940; Green Acres, Farmland, and Historic Preservation, and Blue Acres Bond Act of 1995, ch. 204, 1995 N.J. Laws 1277; Port of New Jersey Revitalization, Dredging, Environmental Cleanup, Lake Restoration, and Delaware Bay Area Economic Development Bond Act of 1996, ch. 70, 1996 N.J. Laws 622; Urban and Rural Centers Unsafe Buildings Demolition Bond Act, ch. 125, 1997 N.J. Laws 453; Statewide Transportation and Local Bridge Bond Act of 1999, ch. 181, 1999 N.J. Laws 1200; Dam, Lake, Stream, Flood Control, Water Resources, and Wastewater Treatment Project Bond Act of 2003, ch. 162, 2003 N.J. Laws 1176; and Green Acres, Farmland, Blue Acres, and Historic Preservation Bond Act of 2007, ch. 119, 2007 N.J. Laws 1034.

Because New Jersey authorizes its general obligation bonds for different purposes through individual laws, the underlying law authorizing a particular general obligation bond issuance should be reviewed before assessing the guarantees the state has made on the bonds at issue.

xvi In July 2010, the New Jersey governor signed into law a provision capping local spending and property tax growth at 2.0 percent per year, unless the tax increase is for, among other things, debt service. Under the new provision, however, property taxes may be increased above the 2.0 percent limit if in excess of half of local voters approve. N.J. Pub. Law 2010, c.44 (approved July 13, 2010).

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The services of Chapman Strategic Advisors LLC do not include legal services and the protections of the client-lawyer

relationship will not exist. Only Chapman and Cutler LLP can provide legal services, if retained pursuant to a separate

engagement agreement with a client. This document has been prepared by Chapman Strategic Advisors LLC for

informational purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as a

recommendation or advice with respect to municipal financial products or the issuance of municipal securities. Accordingly,

readers should consult with, and seek the advice of, their own independent registered municipal advisor with respect to any

individual situation that involves the material contained in this document, the application of such material to their specific

circumstances, or any questions relating to their own affairs that may be raised by such material.

© 2014 Chapman Strategic Advisors LLC

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Documents

"General" Obligation Not a "General Obligation Bond?