Puerto Rico received court approval to leave bankruptcy through the largest restructuring of U.S. municipal debt ever, ending years of conflict with creditors as the U.S. territory confronts other stubborn economic problems.
Tuesday’s court ruling approved a write-down of $30.5 billion in public debts built up during an economic decline marked by high joblessness, outward migration and unsustainable borrowing that tipped Puerto Rico into bankruptcy in 2017. The restructuring plan calms tension between Puerto Rico and its Wall Street creditors dating to its debt default, the largest ever on bonds backed by the full faith and credit of a U.S. municipality.
The territory entered bankruptcy with $74 billion in bond debt and a $55 billion gap between the pension benefits promised to employees and retirees and the funding set aside to pay for them. Public agencies were beset by cronyism and failed for years to draw up accurate budgets or account for expenses, according to a 2018 investigation commissioned by the board.
Sprawling bureaucracy and a high cost of doing business discouraged investment, especially after the expiration of some corporate tax breaks in 2006 pushed some pharmaceutical and other manufacturers to depart. To make up for a shrinking tax base, officials borrowed to paper over deficits and skimped on pension contributions.
Many residents of Puerto Rico, political leaders, and some investors have called for an independent audit of how the huge debt was built up, according to Judge Swain’s decision.
A prolific pension fraud scheme that spread to the insurance industry before being shut down by federal investigators continues to produce fresh lawsuits.
And it also continues to claim new victims — the latest being Shurwest, a successful Scottsdale, Ariz., independent marketing organization. Shurwest filed for Chapter 11 bankruptcy Aug. 31 after executives realized “there’s not going to be anything left,” one of its attorneys said.
According to bankruptcy documents, Shurwest faces 38 pending lawsuits in state and federal courts.
The metrics on the OGSP give a high-level view of how progress can be measured, but they are just part of the data that Regan’s office collects. Hundreds of other data points are in a performance scorecard that includes factors that contribute to attainment of large targets such as reduced crime rate.
High-level goals may take time to achieve. The StocktonStat portal, scheduled for launch on June 30, will include data on the number of potholes and streetlights repaired, or square feet of graffiti removed, says Regan. “The stat process, and this shared data, are part of a continuous conversation and relentless follow up toward our performance targets.”
The invocation of ultra vires to escape bond obligations is nothing new, though. In the second half of the nineteenth century, municipal debtors frequently welched on their debts. In the 1850s and 1860s, cities, towns, and counties across the Midwest and West issued bonds to finance the construction of railroads and other infrastructure. Many ultimately defaulted. Rather than simply announce that they couldn’t or wouldn’t pay, however, they often contended that they needn’t pay: for one or another reason, the relevant bonds had been issued ultra vires and so were no obligation of the municipality at all. Litigation in the federal courts was common. Several hundred repudiation disputes made their way to the Supreme Court in the forty years starting 1859.
With an eye to the modern cases, we set out to understand how the Court reckoned with repudiation. We read every one of the 196 cases in which the Justices opined on bond validity (i.e. the enforceability of a bond in the hands of innocent purchasers). In a recently published article, we correct received wisdom about the cases and remark on the logical structure of the Court’s reasoning.
To the extent the municipal bond cases are remembered, modern scholars usually think of them as exemplary instances of a political model of judging. The caricature has the Court siding with bondholders even when the law called on them to rule for the repudiating municipalities. The Justices—or a majority of them—are imagined as staunch political allies of the capitalist class, set against the institutions of state government and their regard for agricultural interests. We find that this picture is inconsistent with reality. In fact, the Court ruled for the repudiating municipality in a third of all the validity cases. As importantly, the Court’s decisions reflected a readily articulable formal logic, a logic the Justices seem, to our eyes, to have applied soundly.
Citation: Buccola, Allison and Buccola, Vincent S.J., The Municipal Bond Cases Revisited (September 25, 2020). 94 American Bankruptcy Law Journal 591 (2020), Available at SSRN: https://ssrn.com/abstract=3699633
Recent high-profile attempts to repudiate municipal bonds break from what had become a stable American norm of honoring public debt. In the nineteenth century, though, hundreds of cities, towns, and counties walked away from their bonds. The Supreme Court’s handling of repudiation in the so-called municipal bond cases conjured intense animus at the time. But the years as well as the archaic prose and sheer volume of the opinions have obscured the cases’ significance.
This article reconstructs the bond cases with an eye to modern disputes. It reports the results of our reading all 203 cases, decided 1859–1899, in which the Justices opined on bond validity. At a high level, our findings correct a stock narrative in the literature. The standard account paints the Court as a reliable champion of northeastern capitalists in what resembled regional or class politics more than law. That story does not withstand scrutiny, however. We find, for example, that the Court ruled for the repudiating municipality about a third of the time. Moreover, the decisions had a readily articulable logic at the heart of which lay a familiar law/fact distinction. Estoppel barred issuers in most instances from denying factual predicates of bond validity, but it did not prevent scrutiny of legal predicates. The Justices were willing to hold bonds void on even highly technical legal grounds.
Author(s): Allison Buccola (Independent) and Vince Buccola (Assistant Professor, The Wharton School)
Publication Date: 1 June 2021
Publication Site: Harvard Law School, Bankruptcy Roundtable
I predict that state and local government balance sheets, already reeling from the pandemic, will be devastated in coming years by the stock and bond markets’ disappointing returns.
That’s because these governments’ pension plans are based on unrealistic assumptions about how those markets will perform in the future, and are therefore woefully underfunded. In fact, even with their optimistic assumptions, those funds are already underfunded. Their “actuarial funded ratio” (the ratio of the actuarial value of their assets to the actuarial value of their liabilities) is just 71.5% currently.
These plans are hoping to make up their actuarial deficits by earning outsized investment returns. I’m willing to bet their earnings instead will fall far short of historical averages, and they will have to make up the shortfall either by raising taxes, cutting services, or declaring bankruptcy.
Singing River Health System retirees are learning to live on lower pensions than they expected as attorneys continue to press for financial damages from companies they believe are responsible.
A new lawsuit has been filed over the 2014 failure of the SRHS retirement plan, which caught hundreds of retirees and employees by surprise. Biloxi attorney Jim Reeves is suing accounting firm KPMG LLC and Transamerica Retirement Solutions on behalf of 272 members of the retirement plan.
Reeves said in a news release that the companies were paid “hundreds of thousands of dollars to help manage and audit the pension plan and to accurately communicate the status of the plan to members.”
A federal control board created by Congress to address Puerto Rico’s debt on Monday filed a restructure plan that threatens a 10-percent cut to public pensions without any deal with retirees.
The board presented a 233-page plan that would reshuffle at least $35 billion in public debt and more than $50 billion in public pension liabilities, The Associated Press reported.
The proposal, which was filed in U.S. court, includes an up to 8.5 percent cut to monthly pensions of at least $1,500 to help the territory deal with the biggest U.S. municipal bankruptcy filing in history. The board said it received “substantial” support for the plan from creditors, specifically those who have more than $13 billion worth of bonds.
Puerto Rico Gov. Pedro Pierluisi reiterated his stance against the pension cuts outlined in the government’s Plan of Adjustment (POA), presented last night by the Financial Oversight and Management Board (FOMB) before the Title III Court.
“My administration has been emphatic that this cut to pensions is not reasonable and it is not necessary to confirm the Adjustment Plan, so we will leave it established in the confirmation process before the Title III Court,” Pierluisi said in written statements.
The POA is based on the agreements previously reached by FOMB with the Official Committee of Retirees (ORC) and other unions, for which it envisions a reduction of 8.5 percent in the pensions of government retirees who earn more than $1,500 per month, as stipulated by the past POA. This represents between 26 percent and 27 percent of all pensioners.
A framework that outlines how Puerto Rico will restructure at least $35 billion in public debt and more than $50 billion in public pension liabilities threatens a 10% cut to public pensions if no agreement is reached with retirees.
The amended plan of adjustment of 233 pages was filed late Monday in U.S. court by a federal control board that oversees Puerto Rico’s finances and was created by Congress to lift the U.S. territory’s government out of bankruptcy.
The plan includes a proposed cut of up to 8.5% to monthly pensions of at least $1,500. That has long been a point of contention between the board and the governor, who has repeatedly said he would not approve such cuts.
Puerto Rico would substantially reduce its core government debt load under a new deal announced on Tuesday, but obstacles remain for the U.S. territory’s exit from bankruptcy. The island’s federally created financial oversight board said its agreement with certain bondholders was a major step toward resolving the bankruptcy, which began in 2017 in an effort to restructure about $120 billion of debt and other liabilities, including unfunded pensions.
“I’m hopeful that people over time will understand this is likely to be the most fair and confirmable resolution to exit bankruptcy,” Natalie Jaresko, the board’s executive director, told reporters.
The deal will be included in a plan of adjustment the board expects to file in March in federal court, with the hope of court approval in the fall.
The impasse between the governor and a board that oversees Puerto Rico’s finances threatens to throw into limbo attempts to end a bankruptcy-like process for a government that six years ago declared unpayable its more than $70 billion public debt load.
The deal was reached with creditors who hold general obligation bonds and Public Building Authority bonds sold by Puerto Rico’s government and would resolve $35 billion worth of debt and non-debt claims, according to the board. It also would reduce debt held by those creditors from $18.8 billion to $7.4 billion, a 61 percent reduction, and would provide them with $7.4 billion in bonds and $7 billion in cash, among other things.
The board said the deal would free up more than $300 million a year for government services, and that instead of 30 cents for every dollar in taxes and fees that Puerto Rico’s government collects going to creditors, it would be less than 8 cents.