Fiscal Distress Myths and Realities Part X: Need for Continuing Disclosure During Financial Distress

Jan 16, 2017 | Fiscal Distress, Municipal Finance

Part X of James Spiotto’s Fiscal Distress Myths and Realities focuses on the need for timely and complete continuing disclosure on material events during financial distress of state and local government

Myth: It is Best That the State or Local Government in Default Delay Any Public Announcement of Defaults, Alternatives or Current Developments to Prevent Panic and Uncertainty in the Market
Reality: Prompt, Accurate and Continuing Disclosure of Defaults and Periodic Updates on the Financial Status of the Situation are Required and are in the Best Interest of All
The Panic of Financial Distress Can Be Reduced or Eliminated By Full and Prompt Disclosure of the Financial Situation and the Evolving Situation:
  1. Disclosure should not be overly optimistic or pessimistic as to the situation and alternatives
  2. Delayed disclosure of material events in the hope that there soon will be good news to offset the bad is not helpful
Tell One Tell All is the Best Practice:
  1. While everyone will be inquiring, it is always better to publicly tell all investors
  2. If strategically certain information is sensitive then consider, for those investors who desire it, non-disclosure confidentiality agreement with recognition of the restriction on trading that is required by the law
Disclosure May be the Workout or Resolution’s Best Friend:
  1. Disclosure allows all to understand the situation including those who would constructively help if they knew the accurate situation
  2. The state and others who have an interest in the long term financial survival of the local government cannot offer help or solutions if they do not know the full accurate financial situation
Checklist of disclosures to maximize market acceptance in evaluating repayment of bond debt and helps bondholders and trustees in asserting their rights and interests:
  1. 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?
  2. 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. (Alexander Hamilton in the 1790s said the secret of making public credit “immortal” is that whenever public debt is increased, it ought to be accompanied by a sufficient tax increase dedicated to its payment. (Syrett, The Papers of Alexander Hamilton, Vol. 6, p. 106 and Vol. 18, p. 103))
  3. 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?
  4. 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? (Can plan of debt adjustment be confirmed if it is not in compliance with state law by not permitting mandatory priority of payment, set asides or appropriations? Could be a real obstacle to confirming a plan).
  5. Are there effective remedies available if there is a default? – Do the state statutes and case law provide effective remedies (mandamus, intercept, constitutional or statutorily, required set asides, priority of payment, or appropriation) and does state court effectively enforce them?
  6. Is effective state oversight and assistance available to prevent defaults or aid a financially troubled municipality? – Does the state provide by statute or practice the ability to monitor and oversee a financially challenged municipality, provide financial guidance and support to bridge the economic downturn and avoid litigation meltdown and Chapter 9.

Earlier articles in this series:

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

James E. Spiotto, Co-Publisher © James E. Spiotto. All rights reserved