Fiscal Distress Myths and Realities Part VIII: State Oversight and Assistance to Prevent Defaults

Part VIII of James Spiotto’s Series on Fiscal Distress Myths & Realities:

Is Effective State Oversight and Assistance Available to Prevent Defaults or Aid a Financially Troubled Municipality?

Myth: If a Municipality Cannot Cure or Resolve a Default, There is Nothing the State Can Do to Help and the Municipality has no Choice but to File Chapter 9 Municipal Bankruptcy

Reality: There is a Growing Trend for States to Provide Assistance and Oversight Ranging from Monitoring, Early Detection, Technical Assistance to Refunding, Refinancing or Restructuring

Growing and Increased Use of State Oversight, Supervision and Assistance for Emergencies of Local Governments:

States that Provide Oversight and Assistance. At least twenty-eight states, the District of Columbia and Puerto Rico have implemented some form of municipal debt supervision or restructuring mechanism to aid municipalities:

These range from Debt Advisory Commissions (e.g. California) and Technical Assistance Programs (Florida) which provide guidance for and keep records of issuance of municipal debt to the layered approach of Rhode Island and Michigan of oversight commission and fiscal manager or receiver. (See Appendix for further details).
Examples of state oversight, supervision and assistance for fiscal emergencies of local government.

States Recognize the Use of a Municipal Receiver:

The Rhode Island Experience and The City of Central Falls:
- Overseers.
- Budget Commission.
- Receiver.
- Chapter 9.
Texas’ use of judicially appointed receiver vs. financial control board, emergency financial managers, coordination overseers and refinance.

Financial Control Boards and Active Supervision Examples:

The Rhode Island experience and The City of Central Falls.
The New York Experience – Financial Control Board.
The Pennsylvania Experience – Act 47.
The Michigan and Indiana experience – Emergency Managers.
The Massachusetts Ad Hoc experience.
The California experience – Neutral Evaluator.
The North Carolina – Local Government Commission – oversight and approval from the cradle if debt issued to annual financial reports.
Puerto Rico – Puerto Rico Oversight, Management and Economic Stability Act.

Development of a Municipal Protection Commission as a Quasi Judicial Entity to Determine What Costs are Sustainable and Affordable and Which are Not, Including Labor Costs and Benefits and Whether Taxes Should be Raised or Costs Reduced.

The Structure for Oversight and Emergency Financing:

Grants from federal, state and regional governmental bodies.
Loans from federal, state and regional governmental bodies.
State intercepts of tax revenue.
Involvement in local government budget process.
Required financial performance and targeted levels of essential governmental services.
State legislative assistance in tax revenue and powers.
Back-up by moral obligations of the state.
Considerations regarding the appointment of authority members.
Acceleration of loans and obligations if performance triggers are violated.
Dealing with the press.
What powers are essential for state oversight and assistance.
Exploration of transfer of certain governmental services (and related costs) to other governmental bodies.
Consolidation of regional essential governmental services.
Power to authorize Chapter 9 if needed or bridge financing or refinancing of troubled debt.
Use of intercept of state tax payable to municipality to ensure essential municipal service.
Private public partnerships – Lease and sale of municipal properties to provide bridge financing and cash flow relief.
Vendor assistance program – Providing vendor payments through securitization financing of payables. Payment from dedicated tax revenues over time. Provide current cash flow relief from current or future vendor payments.
Explore consolidation on a regional basis of certain governmental services.
Monitor compliance with any restructuring plan to ensure compliance and prevent financial erosion.

Applicable State Assistance, Refinancing and Restructuring Mechanism Should Be Disclosed.

To the degree state has effective and applicable mechanism to help prevent default or provide funds or assistance to prevent default or methods of solving financial problems of municipal issuers this is information important to the investor and should be considered to be disclosed to the investor. Such information may improve the perception of the issuer’s credibility in the market.

Earlier articles in this series:

Fiscal Distress Myths and Realities Part I: Default Rate

Fiscal Distress Myths and Realities Part II: Use of Chapter 9

Fiscal Distress Myths and Realities Part III: Consequences of Default

Fiscal Distress Myths and Realities Part IV: Can a Municipality File Chapter 9?

Fiscal Distress Myths and Realities Part V: Factors that Help Prevent Municipal Default

Fiscal Distress Myths and Realities Part VI: Types of Public Debt Honored in Full in Chapter 9

Fiscal Distress Myths and Realities Part VII: Remedies in State Law

Look out for more parts of James Spiotto’s Fiscal Distress Myths & Realities coming soon.