Muni's anyone?

Today's speaker is our own Rick Ashburn. Rick is a graduate of the University of Maryland and UCLA. During his career he has become an expert on municipal bonds and has advised governmental entities including the State of California and the SEC. Rick is now in private practice and manages a portfolio of $75 million in municipal bonds.

His initial topic was going to be 'How I survived being Paul Filinger's son-in-law. Since Paul is with us today, Rick will instead discuss municipal bankruptcies. Can a city go out of business? As a veteran member of Lamorinda Sunrise, Rick opted to spare us our regular AV challenges...thank you Rick!

Rick began by advising us that he is not a lawyer, but he can read, so he will share knowledge that he has gathered through the years. There is no definitive body of knowledge about municipal bankruptcies, so Rick has spent a lot of time over the years gathering information.

Bankruptcy in the United States is governed under the United States Constitution (Article 1, Section 8, Clause 4) which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States."  The concept of the Founding Fathers was to do away with debtor's prison by allowing for the resolution of financial issues in court.

How about Bankruptcy then?

There are two types of bankruptcies - liquidation and reorganization. Most bankruptcies are reorganizations. Cities fall under chapter 9 of the bankruptcy code when they want to reorganize.  Bankruptcy reorganization is about establishing the priorities of the claims of creditors. Secured creditors get paid before unsecured creditors.

States have the right to decide whether cities, counties or special districts can file bankruptcy in their state. In California, it is allowed.  A school district however is not allowed to file bankruptcy in CA so a district like Richmond went into receivership.

There are two types of municipal bankruptcies:

Event driven - In situations like Orange County, the bankruptcy was driven by bad investment decisions. When the City of Mammoth Lakes filed it was based on a judgment from a development related lawsuit that they lost so it was an isolated event.

Chronic issues - The long term ability of entity to pay debts in impaired. For Vallejo, Stockton and San Bernardino - it is all about pensions. Rick has had the opportunity to work with lots of cities and it is always about pensions.

Municipalities have various 'pots on money' aka funds: The General Fund is for regular operations. Revenue is derived from sales taxes and property taxes. Since California cities can't raise taxes, it is difficult to raise revenues. An Enterprise fund is for a specific use (i.e. water fund). There are Chinese walls in place so Enterprise funds can't be used for General fund expenses. In Stockton, it is the General Fund that has filed bankruptcy.

The California constitution says municipalities can't borrow money without a vote of the people but there are loopholes that cities exploit. One example is that the City can create a public debt through leases - form a special fund to build a building and then the City signs a long term so they can use the building.

And then, it gets really complicated!

Pension debt is unsecured and is payable from the general fund. The City has no ability to raise revenue. There is current discussion around the question, how did the pension obligation arise? Is it a contract between employer and employee - or - is it a right granted by the Constitution of CA?

In Stockton, the Federal judge says that federal law trumps state law. Judge has signaled that if he decides that pensions are not a contract, he can alter prior practice so a clash between federal law and state law is coming.

If the pensions are unsecured and are to be paid from the general pool, it is generally the practice of the bankruptcy courts to put everyone in the same pool ' to make everyone equally unhappy'. If pensions are put into this pool, pensioners will be in with other similarly situated creditors and all must be treated the same.

A private company  can forced  into bankruptcy by a creditor, or the company can file itself. A City  can only file for itself and receivership is not an option, so the same people who got the entity into trouble continue to run it.

.An interesting situation arises when city workers live in the city that they work for. They can be a powerful force in the election of the same group of people who negotiate with them. So they have a lot of control. That is not the situation in Lamorinda since very few city employees live in the communities  .

CalPers is the most powerful agency. Stockton is currently trying to address its issues by issuing new financing. In a bankruptcy, voter approved bonds get paid. Non-voter approved bonds don't have the same protection.

In response to questions, Rick shared

• The state can't file for bankruptcy.
• Upcoming state bond offering has a low return
• Pension benefit guarantee applies only to private companies

Rick concluded that the in next decade this will play out...and it will be interesting to see what happens.

Who but our own Rick Ashburn could have made the topic of municipal bankruptcies this riveting? Thanks to Rick for his presentation!