Busted land deals and empty subdivisions bankrupted more governmental entities in Brian C. Doyle’s home state than anywhere in America. With the recent financial collapse of three of its cities, it might be easy to assume he’s from California.
Doyle, however, lives in Nebraska.
Quirks in local, state and federal law have made Nebraska home to almost one-fifth of the more than 220 Chapter 9 bankruptcies filed in the U.S. since 1981, according to a nationwide review of federal court records. California, with more than 20 times Nebraska’s population, is second, followed by Texas and Alabama. California may soon add to its total, as San Bernardino decides whether to seek court protection this week.
The main difference between Nebraska and its larger brethren is the kind of governmental bodies that file for bankruptcy. No town, city or county has sought court protection in the state. All 45 of Nebraska’s Chapter 9 cases were by special tax districts, most of them owned by residential subdivision developers who used property-tax revenue to pay for streets, sewers and other infrastructure.
“Chapter 9 is an effective tool that can be used to protect taxpayers and treat creditors fairly,” said Doyle, a land-use attorney in Omaha who represents bankrupt subdivisions. Those special tax districts become vulnerable to bankruptcy when housing sales slow, he said.
Chapter 9 Filings
Only about 20 percent, or 43, of the Chapter 9 cases filed in the U.S. since 1981 were by towns, cities or counties. Of those, California, Alabama and Texas led the way, accounting for more than two-fifths of such filings, according to a Bloomberg News review of court filings.
The three states share the regulatory confluence of strong restrictions on revenue-raising and low bars on bankruptcy filing.
In California, five of its 39 Chapter 9 petitions were made by cities or counties: Orange County in 1994, and the cities of Desert Hot Springs in 2001, Vallejo in 2008, and Stockton and Mammoth Lakes in the past month. Alabama had seven such filings by cities and counties, including one repeat, and Texas had six filings by five cities.
Elected officials in San Bernardino, a town at the foot of a mountain range that shares its name and about 60 miles (97 kilometers) east of Los Angeles, voted July 10 to seek U.S. court protection. Since then, they have been trying to decide whether to file a Chapter 9 case immediately or use state- mandated mediation with creditors first.
San Bernardino’s City Council will hear advice from lawyers today about whether it should declare a fiscal emergency and put the municipality into bankruptcy without going through the 60- day mediation process.
Five States
Just five states account for more than half of all types of Chapter 9 filings in U.S. bankruptcy courts: Nebraska, California, Texas, Alabama and Oklahoma.
Their numbers are dwarfed by those of corporate reorganizations. Since 1981, more than 20,000 companies have sought protection under Chapter 11 of the U.S. bankruptcy code.
Chapter 9, used by local governments and entities they create, differs significantly from Chapter 11, the section written for private companies and nonprofit groups. State lawmakers must pass a law authorizing local governmental bodies to file for bankruptcy before they can do so.
About half of the states allow full, or conditional, access to bankruptcy court, according to a legal analysis by Jim Spiotto, a bankruptcy attorney with Chapman & Cutler LLP in Chicago who helped write a book about municipalities in financial distress. Nebraska grants special tax districts unobstructed access to bankruptcy courts, Doyle said.
Difficult Politically
For cities and counties, filing a Chapter 9 case is also more difficult because it requires a vote of elected officials.
“Political will is clearly an important factor,” said Lary Stromfeld, a New York-based attorney who specializes in capital markets and distressed municipal debt at Cadwalader, Wickersham & Taft LLP, of Chapter 9 filings. “It’s a difficult thing to do politically.”
Once in bankruptcy, Chapter 9 gives cities and counties an advantage over companies using Chapter 11 to reorganize. Unlike a company, municipalities don’t need to ask the bankruptcy court for permission to pay any bills they ran up before filing for court protection, including wages, utility bills and rents.
That means creditors can’t put as much pressure on a city over its spending habits, as sometimes happens in Chapter 11 cases, said Lee Bogdanoff, an attorney with Klee Tuchin Bogdanoff & Stern LLP. The Los Angeles law firm represents Mammoth Lakes and Alabama’s Jefferson County, which filed the biggest municipal bankruptcy in the U.S. last year, listing more than $4 billion in debt.
Reorganization Plans
Chapter 9 creditors also can’t offer their own reorganization plan and aren’t entitled to form an official committee with legal fees paid by the municipality. Unsecured creditors typically have those rights under Chapter 11, which is used by companies to try to stay in business and reorganize.
Small tax districts are more easily reorganized than cities or counties, mainly because the districts typically don’t have to contend with labor unions, Doyle said.
In Nebraska, Chapter 9 bankruptcies are more like prepackaged Chapter 11 cases because the district owners and creditors most often work out an agreement beforehand, he said.
Cases in Nebraska usually take only a few months to go through the federal court system and most are approved by a U.S. bankruptcy judge based on whatever deal is worked out with creditors. Those deals almost always guarantee full repayment of bondholders’ principal, stretched over a longer period of time and at a lower interest rate, Doyle said.
Housing Slump
Most of the subdivisions that own the special tax districts are located in or around Omaha, Doyle said. In the next two years, as many as 10 more of the special districts may go bankrupt as debt comes due for subdivisions built during the housing slump that followed the credit crisis, he said.
Since the Great Depression of the 1930s, no U.S. municipality has used bankruptcy to force bondholders to take less than the full principal due, according to Spiotto and Richard Ciccarone, chief research officer at McDonnell Investment Management LLC in Oak Brook, Illinois.
That may change, if Stockton’s lawyers have their way. The bankrupt municipality has begun a historic effort to be the first American city to use bankruptcy to successfully impose losses on bondholders.
Similar Traits
California, Alabama and Texas share several traits that help explain why they have such a large share of municipal bankruptcies, Spiotto said.
All three allow cities and special tax districts to file bankruptcy with few, if any, conditions. While California requires cities to first go through mediation with creditors, a loophole lets officials declare an emergency to shorten, or even eliminate, the talks.
In Alabama, a state supreme court ruling this year in the Jefferson County case made it easier for municipalities in that state to meet Chapter 9 eligibility standards.
“One of the things that many states are asking is, ‘Should we have more active supervision?'" Spiotto said.
The three states also restrict the power of local officials to increase existing taxes or impose new ones.
Sewer System
In Alabama, only state lawmakers can authorize new local taxes. Jefferson County lost about $70 million in revenue when the state high court struck down a wage tax.
The decision, combined with a sewer system that doesn’t generate enough money to cover payments on about $3.2 billion in debt, forced the county into bankruptcy, according to court documents.
In California, cities struggle with the effects of the 1970s tax reform known as Proposition 13, which limits how quickly property taxes can increase, said Michael A. Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.
And in Texas, the state constitution limits how much cities with more than 5,000 people can collect annually in property taxes, Spiotto said.
Public officials have traditionally been wary of Chapter 9 for fear of alienating the bond market and driving up the future cost of borrowing, said Spiotto, who represents a group of Jefferson County’s creditors.
Political Stigma
Those fears and the political stigma may be fading as cities, especially in California, face increased budget pressures, said Matt Fabian, a managing director for Municipal Market Advisors, based in Concord, Massachusetts.
“Stockton has a potential to reverse the precedent,” Fabian said. “Cities tend to follow the example within their states. Things that happen tend to keep happening.”
Stockton on June 28 became the biggest U.S. city to seek court protection, listing assets of more than $1 billion and debt of more than $500 million. The collapse of the housing market left Stockton, a city of about 292,000, to contend with mounting retiree health-care costs and an eroding tax base in the wake of the recession, while accounting errors overstated municipal revenues.
Mammoth Lakes, a High Sierra resort town of 8,200, followed Stockton into bankruptcy on July 3 to shield itself from a $43 million judgment won by a land developer in a lawsuit.
San Bernardino
In San Bernardino, a city of 209,000, officials are looking to Chapter 9 after being confronted with a $45 million fiscal- year deficit fueled by declining tax revenue and growing employee costs.
Despite any perceived stigma, the option for municipalities to seek court protection may be gaining favor due to political expediency, bankruptcy attorney Stromfeld said.
“Municipalities are recognizing that it can be a very valuable tool to address these difficult financial situations,” he said.
The California cases are in Re Stockton, 12-32118, and In re Mammoth Lakes, 12-32463; U.S. Bankruptcy Court for the Eastern District of California (Sacramento).
To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net.
To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net
Source: www.businessweek.com
California cities eye plan to seize mortgages - AZCentral.com
FONTANA, Calif. -- In the foreclosure-battered inland stretches of California, local government officials desperate for change are weighing a controversial but inventive way to fix troubled mortgages: Condemn them.
Officials from San Bernardino County and two of its cities have formed a local agency to consider the plan. But investors who stand to lose money on their mortgage investments have been quick to register their displeasure.
Discussion of the idea is taking place in one of the epicenters of the housing crisis, a working-class region east of Los Angeles where housing prices have plummeted. Last week brought another sharp reminder of the crisis when the 210,000-strong city of San Bernardino, struggling after shrunken home prices walloped local tax revenues, announced it would seek bankruptcy protection.
Now -- and amid skepticism on many fronts -- officials from the surrounding county of San Bernardino and cities of Fontana and Ontario have created a joint powers authority to consider what role local governments could take to stem the crisis. The goal is to keep homeowners saddled by large mortgage payments from losing their homes -- which are now valued at a fraction of what they were once worth.
"We just have too much pain and misery in this county to call off a public discussion like this," said David Wert, a county spokesman.
The idea was broached by a group of West Coast financiers who suggest using the power of eminent domain, which lets the government seize private property for public use. In this case, they would condemn troubled mortgages so they could seize them from the investors who own them. Then the mortgages would be rewritten so the borrowers would have significantly lower monthly payments.
Steven Gluckstern, chairman of the newly formed San Francisco-based Mortgage Resolution Partners, says his main concern is to help the economy, which is being held back by the mortgage crisis.
"This is not a bunch of Wall Street guys sitting around saying, 'How do we make money?'" he said. "This was a bunch of Wall Street guys sitting around saying, 'How do you solve this problem?'"
Typically, eminent domain has been used to clear property for infrastructure projects like highways, schools and sewage plants. But supporters say that giving help to struggling borrowers is also a legitimate use of eminent domain, because it's in the public interest.
Under the proposal, a city or county would sign on as a client of Mortgage Resolution Partners, then condemn certain mortgages. The mortgages are typically owned by private investors like hedge funds and pension funds.
Under eminent domain, the city or county would be required to pay those investors "fair value" for the seized mortgages. So Mortgage Resolution Partners would find private investors to fund that.
Mortgage Resolution Partners will focus on mortgages where the borrowers are current on their payments but are "under water," meaning their mortgage costs more than the home is worth. After being condemned and seized, the mortgages would be rewritten based on the homes' current values. The borrowers would get to stay, but with cheaper monthly payments. The city or county would resell the loans to other private investors, so it could pay back the investors who funded the seizure and pay a flat fee to Mortgage Resolution Partners.
The company says that overall, all parties will be happy. The homeowners, for obvious reasons. The cities, for stemming economic blight without using taxpayer bailouts. And even the investors whose mortgage investments are seized. Mortgage Resolution Partners figures they should be glad to unload a risky asset.
Rick Rayl, an eminent domain lawyer in Irvine, Calif., who is not connected to the company, isn't so sure.
"The lenders are going to be livid," he said. He thinks the plan could have unintended consequences, like discouraging banks and other lenders from making new mortgage loans in an area.
The company says that focusing on borrowers who are current on their loans is a smart way to do business, rewarding those who are already working hard to keep their homes. But, Rayl pointed out, those are also the exact mortgages that investors are eager to keep.
Already, the outcry was heard at the first meeting of the joint powers authority on Friday, even as chairman and San Bernardino County chief executive Greg Devereaux said the entity -- which was inspired by Mortgage Resolution Partners' proposal -- has not yet decided on a specific course of action.
Timothy Cameron, managing director of the Securities Industry and Financial Markets Association's asset managers group, told the authority that residents of the region would find it harder to get loans and investors -- including pensioners -- would suffer losses. He also said such a move would invite costly litigation.
"The use of eminent domain will do more harm than good," he said. "We need mortgage investors and lenders to come back to these fragile markets -- but this plan will force both groups to avoid them."
But Robert Hockett, a Cornell University law professor who serves as an unpaid adviser to Mortgage Resolution Partners, was unsympathetic. He likes how the plan forces the hand of uncooperative investors, who have sometimes stifled plans to reduce mortgage payments.
"It's kind of like saying a loan shark objects to anti-predatory lending laws," Hockett said.
Theodore Woodard, a 62-year-old retired air conditioner installer, said he'd welcome the help on his five-bedroom home in Fontana. So far, he and his wife have kept up with monthly $3,100 payments, plus taxes and insurance, but it hasn't been easy, and they have watched several neighbors in the well-manicured neighborhood some 50 miles east of Los Angeles lose their homes to foreclosure.
"We've been making our monthly payments, barely making them, but we just pay them and try to survive off what's left," said Woodard, who estimates his house has lost a third of its value since 2004.
In San Bernardino County, the problem is clear. The median home price has plunged to $150,000 from $370,000 in five years. The combined San Bernardino-Riverside metro area has the highest foreclosure rate of any large metro area in the country, at four times the national average, according to RealtyTrac, which tracks foreclosure properties.
Devereaux, who has seen other plans to fix the housing crisis peter out, is cautious.
"I don't know whether this will work or not," he said. "But we do think we have a responsibility to explore it."
Rexrode reported from New York. AP Business Writer Daniel Wagner contributed to this report from Washington, D.C
.
Source: www.azcentral.com
Little Compton stove heads for movie role, in Iceland - East Bay
LITTLE COMPTON — An antique stove from Little Compton is heading off to Iceland early this week to take a starring role in a movie or television series, it’s not clear which.
The call for the stove came through to Emery Pineo at his Antique Stove Hospital on Long Highway from a Brooklyn producer a week ago.
Could Mr. Pineo please send some photos of old stoves that he had on hand that might be suitable for use in a film, the producer asked?
“They wanted a big, ugly stove that looked like it had sat in the corner forever,” Mr. Pineo said.
The Antique Stove Hospital Mr. Pineo, 68, operates with his son Brandon Pineo, 34, has anywhere from 200-300 antique stoves on hand at any given time, Mr. Pineo said, so it was easy to accommodate the man from Brooklyn.
A retired science teacher from Barrington Middle School, Mr. Pineo has been collecting and restoring old stoves for over 40 years. He sent the Brooklyn producer a handful of photographs.
Last Friday morning the producer called back, Mr. Pineo said. Based on the photographs, the producer chose a “Kalamazoo Model Oak,” and wanted it crated and shipped Monday, two days hence.
“I have to get it pretty,” Mr. Pineo said Friday, as he planned his work for the weekend ahead. Crating is easier that people might think, he said.
The Kalamazoo stove the producer wanted was built just about 100 years ago. They were mail order stoves back then. The marketing slogan used in selling the things to customers, Mr. Pineo said, was, “a Kalamazoo, direct to you.”
The particular stove Mr. Pineo is crating up for the film stands five feet tall and weighs about 300 pounds. “It’s gravity that holds it together,” he said.
Mr. Pineo isn’t really clear about the actual film production in which the old stove has a starring role. “Iceland’s version of ‘Cheers,’” he said at one point. A movie entitled ‘‘The Secret Life of Walter Mitty,” part of which he said was being filmed in Iceland, he said at another point.
He said the idea is that the old stove will sit in a corner somewhere on the set, and just look old. He said the producer didn’t want the stove to look all spruced up and shiny.
Mr. Pineo ships old restored stoves all over the world. Last October he got a call from a man in Dubai who saw a stove on Mr. Pineo’s website and wanted to buy it. He paid with a credit card, Mr. Pineo said, and placed a condition on the purchase.
“The stove had to be completed and restored in five weeks to meet the deadline for being loaded on the purchaser’s own container shipwhen it docked in Boston Harbor.”
Mr. Pineo has also shipped to New Zealand and Alaska.
“We’re getting a lot of people going off the grid,” he said. “The doomsday preppers.” He said he estimated about 70-875 percent of his sales these days are from “preppers and homesteaders.”
“They want to be self-reliant,” he said.
Though the price varies, he said the stoves sell for roughly $2,800 per each.
Source: www.eastbayri.com
Small gasoline price rise is California's first in nine weeks - Los Angeles Times
Retail gasoline prices in California are rising for the first time in nine weeks, according to the AAA Fuel Gauge Report. The national average also rose modestly over the past week.
In California, the average cost of a gallon of regular gasoline is $3.716, up 0.8 cent since last Monday. Just a month ago, the state's average was 29.7 cents a gallon higher. California prices are also 8.2 cents a gallon below the 2011 amount.
The national average for a gallon of regular gasoline rose by 1.4 cents since last Monday to $3.396 a gallon, the AAA said. That's 11.9 cents a gallon lower than last month and 27.8 cents under the average in 2011.
In other energy news, U.S. crude oil prices were creeping higher, up 22 cents a barrel to $87.32 a barrel on the New York Mercantile Exchange. Analysts said that the rise was based on hopes that the Federal Reserve would take additional steps to prop up the weak U.S. economic recovery.
In the past two weeks, U.S. oil prices have regained about $10 of the $30 a barrel they lost in late June.
ALSO:
IMF: global growth remains week
Retail sales fall a third straight month
Source: www.latimes.com
California public pension fund earns only 1 percent - San Jose Mercury News
SACRAMENTO -- The nation's largest public pension fund reported a 1 percent return on its investments, a figure far short of projections that will likely add pressure on California's state and local governments to contribute more, officials said Monday.
The California Public Employees' Retirement System reported its returns for the fiscal year that ended June 30. The 1 percent return is well below its projected annual return of 7.5 percent.
"The last 12 months were a challenging period for all investors as the ongoing European debt crisis and slowing global economic growth increased market volatility and reduced equity returns," said chief investment officer Joe Dear. "It's a clear reminder that we must remain focused on performance, risk and internal controls in today's financial environment."
Dear said the fund was most impacted by a minus-7 percent return on global equities. Half the pension's assets are in equities, he said.
CalPERS, which has yet to recover from the recession, runs a $234 billion pension system for more than 1.6 million state employees, school employees and local government workers.
The preliminary returns reported Monday were even lower than the state's teacher pension fund, which earned 1.8 percent from investments.
Dear said the returns would result in increased pension contributions from the state, school districts and municipalities, most of which are already financially stressed.
He said the fund's long term 7.5 percent target remains "realistic" but noted that recent returns have been the lowest in a generation. For the last five years, CalPERS earned just 0.1 percent. Over 20 years, the fund earned 7.73 percent.
"It does imply that we're going to have to employ new strategies in terms of where we invest and how we manage risk if we were to retain that 7.5 return target," Dear said.
The investment returns are critical because taxpayers are on the hook for the difference if the pension funds fail to meet their performance targets.
California taxpayers are already on the hook for billions of dollars in pension and health care benefits promised to public workers when they retire. The state said pension contributions accounted for 2.4 percent of state spending in 2006. It's expected to reach 3.9 percent of this year's $91.3 billion budget.
Local governments have seen their pension burdens increase even faster.
So far, Gov. Jerry Brown and Democratic lawmakers have not been able to strike a deal on statewide pension reform. Talks will continue after lawmakers return from a monthlong recess next month.
Brown, a Democrat, issued a comprehensive proposal last fall that focused on raising the retirement age to match Social Security and moving new workers to a hybrid system in which defined benefits are combined with a 401(k)-style plan widely used in the private sector.
Lawmakers said they want to allow workers to retire before age 67 with reduced benefits. They are refusing the governor's call for a defined contribution plan that places some of the risk on employees.
Source: www.mercurynews.com
RPT-Cash-strapped California cities repay development funds - Reuters
* Cities part with redevelopment funds under protest
* Local budgets hit by elimination of agencies
* Funds re-routed to schools
* Some cities may challenge legality of state reclaiming the funds
By Ronald Grover and Jim Christie
LOS ANGELES/SAN FRANCISCO, July 16 (Reuters) - California cities, including many facing severe budget problems, are struggling to comply with an order issued last week to return millions of dollars of economic development funds as Governor Jerry Brown's controversial shutdown of the state's redevelopment agencies moves forward.
As many as 400 cities were notified by e-mail on July 9 of their bills for repayment of funds that they had earmarked to repair streets, apartment buildings or for other projects through now-defunct redevelopment agencies. Cities that do not pay up face having tax revenue withheld beginning this week.
Redevelopment agencies were originally established to help restore blighted areas. They were funded by the increased tax revenue from property they helped to improve or rebuild. But over the years redevelopment money has made up an increasing percentage of local property tax revenue and city programs.
Many cities had grown accustomed to using redevelopment funds for a variety of purposes and have complained bitterly about the shutdown of the agencies. The city of San Bernardino cited the loss of $6 million in redevelopment funds as one reason behind its recent move to seek bankruptcy protection.
Last week, many of the cities repaid the funds under protest, including some that say they are contemplating legal action.
San Diego paid $89 million to San Diego County "to avoid penalties that would further burden taxpayers," Mayor Jerry Sanders' office said in a statement on Friday, adding that the payments were made "under protest and with reservation of all rights to challenge the legality of the mechanism used by the State to calculate the demanded payment."
"We've done a good job managing the wind-down of redevelopment and paying our bills on time," Sanders said in the statement. "Now the State has changed the rules and is trying to plug the budget holes that they have created."
LAYOFFS
In June, Moody's Investors Service downgraded to Ba1 $11.6 billion in California tax allocation bonds rated Baa3 or higher, citing increased uncertainty regarding timely debt service payments. Outstanding redevelopment bonds are now the responsibility of "successor agencies," which in many cases are the cities themselves.
Twelve cities unsuccessfully sought a restraining order to block the state from collecting their remaining redevelopment funds, arguing that it would restrict their ability to pay their obligations on bonds.
The Orange County city of Westminster returned nearly $9 million "under protest," the city council said after a special meeting on July 12.
Westminster, which last year received $38 million in redevelopment tax revenue, laid off 49 staffers in February, mostly from its building codes and inspection unit, after the legislature initially passed legislation to abolish the agencies.
The Northern California city of Pittsburg fared better, even though it paid $3.3 million. It successfully disputed its initial $7.3 million bill by pointing out mistakes the state made in calculating its bill.
The city of Pinole, near San Francisco, borrowed $1 million to send the state and intends to repay that from general funds, city manager Belinda Espinosa told the San Jose Mercury News.
The city, which has 95 full-time positions, cut 53 slots over the last three years.
"The real story is that some cities can no longer charge off staff costs to that money, and that could mean layoffs," said La Mirada City Manager Tom Robinson, whose city returned $64,000.
The city of 48,000 south of Los Angeles is not facing a budget crisis but the city will ask voters on Nov. 6 to increase its 8.75 percent sales tax to 9.75 percent to help fund future capital improvements.
Source: www.reuters.com
No comments:
Post a Comment