Cities get creative in finding ways to resolve bankruptcy

As more cities face dire financial straits, here is a quick overview of the means by which different American cities have escaped bankruptcy:

When Bridgeport, Connecticut filed for Chapter 9 in 1991, they received help from a state oversight board, and also convinced Chase Manhattan to keep its Connecticut headquarters in Bridgeport which helped. There were other approaches, too, one part of which was arranging for Donald Trump to buy out 100 acres of publicly owned property to develop an amusement park and motor race track, though that never came to pass. In 1992, The New York Times reported that there were also “measures including a plan to recover delinquent property taxes by selling tax liens to a private collection agency,” as well as acquisitions for aid from the state, and “concessions from the city’s unions.”

Among the more colorful approaches in recent years was Harrisburg, Pennsylvania’s. In 2011, having been huckstered by a corrupt company to build an up-to-code (and ultimately faulty) trash-to-energy incinerator, the Keystone State’s capital city petitioned for Chapter 9. They sold the incinerator for $130 million, as well as auctioned off a collection of Wild West artifacts owned by a former mayor which brought in nearly $4 million. It also monetized its parking assets, which included privatizing garages, in effect doubling the price of city parking which, for virtually the first time, they began enforcing…

[Jefferson County, Alabama’s] exit from bankruptcy? They cut their payroll, as well as almost a quarter of the workforce. They shut down many of their satellite courthouses in the suburbs, in addition to a number of “nonessential” services: A nursing home sold to a private operator (to the tune of $8.3 million), a public hospital shut down, and the closing of a massive county laundry facility. Patrick Darby, who represented Jefferson County in its bankruptcy filing, said “I have to say in all fairness, what we did here is easier than it would’ve been in California or up north because we don’t have unions… we don’t have public sector unions and so we don’t have to fight that if we want to lay people off.”

So what does this all mean? Every municipality comes up with its own unique solution, and in the case of Jefferson County that meant shutting down a “charity hospital;” in New York that meant laying off 6,000 school teachers who’d leveraged their pensions; and in Vallejo that meant making it possible for the courts to compel unions to break their collective bargaining agreements, a ruling which now extends to the rest of California, and, having some of the strongest labor unions in the country, seems plausible that it could extend to other states, too. And if we’re going to talk about rhetoric, unions are the group often identified as the primary problem behind fiscal insolvency—when, rather, it’s other underlying fiscal crises that make it impossible for those municipalities to fund the pensions they’d committed to long ago. As Marc Levinson says, “It’s just that we’ve made these promises to people who’ve given their lives in service based on this promise and now we can’t afford it!”

As the article notes, “the leniency of the U.S. bankruptcy code” helps allow this creativity. But, I wonder if this kind of creativity ever runs out – what if there is a bankruptcy that is simply too big (though it is hard to imagine one bigger than New York City in the 1970s) or there are too many at once (imagine three or four major cities going through bankruptcy at the same time or within a single state, like California) or creditors and local groups are simply unwilling to budge? What happens then? We haven’t reached that point yet…

Stockton, CA the first big US city to enter bankruptcy

Stockton, California, home to more 291,000 people and over 685,000 people in the metropolitan area, is the largest US city to enter bankruptcy:

A judge accepted the California city of Stockton’s bankruptcy application on Monday, making it the most populous city in the nation to enter bankruptcy.

U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services…

Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city’s tax base

The city’s creditors wanted to keep Stockton out of bankruptcy—a status that will likely allow the city to avoid repaying its debts in full.

They argued the city had not cut spending enough or sought a tax increase that would have allowed it to avoid bankruptcy.

An interesting case. I think the real question is whether Stockton is the last or biggest city to declare bankruptcy and whether there are more to come. Stockton is part of an area in California that was hit particularly hard by the housing bubble and a number of other cities have experienced financial difficulties. For example, several California cities have outsourced basic services.

Speaking more broadly, what punitive measures can be leveled against a community in such debt? Is it the taxpayers and creditors who end up being the real losers?

More California communities in fiscal trouble

The Los Angeles Times suggests more California communities are going to have to go beyond contracting out services and consider more drastic financial moves:

Once rare, turning to bankruptcy has become a painful but enticing option for cities whose labor costs and municipal debt far outpace anemic tax revenues. The Bay Area city of Vallejo began the current trend in May 2008, filing for Chapter 9 bankruptcy protection because, city leaders said, salaries and benefits for its public safety workers were eating up too much of the general fund.

Last month, Stockton became the largest city in the state to seek bankruptcy protection after it was unable to come to agreement with its employee unions and creditors on a plan to close a $26-million gap in its general fund. On July 2, the tiny resort town of Mammoth Lakes filed bankruptcy papers in part because it was saddled with a $43-million court judgment it couldn’t pay.

San Bernardino couldn’t close a $45.8-million budget shortfall and would be unable make its payroll this summer. Days before Tuesday’s City Council vote, the city of 211,00 people had just $150,000 in the bank. The city barely scraped together enough money to cover its June payroll.

Rising pension costs are are a growing issue in many places but not the only concern in this situation. Both states and the federal government have less money to contribute for local services and budgets. Tax revenues, property and sales taxes, are at least not growing much if not down. Residents and employees make it difficult to reduce service levels. How many people will be willing to live in certain suburbs and cities if the service levels have to decrease?

It will be interesting to watch these communities that have declared bankruptcy. The current mayor of Vallejo, California suggests the move wasn’t necessarily good for the community:

The Bay Area city of 112,000 was forced to shut down two of its fire stations and today fixes just 10% of its crumbling roads. Its workforce, including police and firefighters, is about half its pre-bankruptcy size and those people left are “insanely” overworked.

Meanwhile, Vallejo spent $10 million on legal fees. It ended up with employee contracts that Osby thinks the city could have struck more cheaply if it had stayed out of bankruptcy court and turned to the bargaining table.

But perhaps bankruptcy is the only route that “successfully” convinces everyone that something needs to change…

“More U.S. cities set to enter default danger zone”

A Reuters story suggests more municipalities are having trouble keeping up with their debt:

Bond defaults were $25.355 billion in 2011, or nearly five times the value of defaults in 2010, according to Lehmann. In 2012’s first quarter, defaults totaled $1.245 billion, or more than double the $522 million of last year’s first quarter.

Municipal bankruptcies, such as last November’s landmark, $4.23 billion Chapter 9 filing by Alabama’s Jefferson County mainly because of its excessively expensive sewer system mocked as a Taj Mahal project, have picked up, too.

Chapter 9 municipal bankruptcy filings doubled to 13 in 2011 from six in 2010, but still remain rare among the more than 60,000 issuers, with only 49 of the 264 cases since 1980 being towns, cities, villages or counties, according to James Spiotto of Chapman and Cutler LLP. States are ineligible for Chapter 9.

Outsized pension-deficit payments and other liabilities, as well as depressed local economies or failing government projects such as Harrisburg’s trash incinerator, often herald crises, according to Ciccarone.

While much of the focus has been on the national debt and national figures (such as unemployment, jobs created, where to set the tax brackets, etc.), all of this is trickling down to the local level. Since many municipalities and local taxing bodies are heavily dependent on property taxes, a decrease in housing values and a continued sluggish housing market suggests many communities will struggle to find revenue. In other circumstances, local bodies might be able to look to states and the federal government for monetary help but they have their own issues during this economic crisis.

I would love to see experts speculate on where this all will end up in five or ten years. Are we legitimately in danger of a lot of municipal governments defaulting? If so, how will this affect local services? How will residents respond to what will be more fees and taxes even as their services might decrease? Could the wealthier people respond with their feet and move to more financially solvent communities?

Righthaven loses in Colorado

Last week, Righthaven was flirting with bankruptcy due to legal fees associated with a Nevada case.  This week, the fees keep piling up, this time in Colorado:

Righthaven’s only interest in the Work is “the right to proceeds in association with a Recovery.”  The Copyright Assignment Agreement defines “Recovery” as “any and all sums . . .arising from an Infringement Action.”  Thus, when read together, the Assignment and the Copyright Assignment Agreement reveal that MediaNews Group has assigned to Righthaven the bare right to sue for infringement – no more, no less.  Although the assignment of the  bare right to sue is permissible, it is ineffectual….Accordingly, Righthaven is neither a “legal owner” or a “beneficial owner” for purposes of § 501(b), and it lacks standing to institute an action for copyright infringement….I convert Mr. Wolf’s Rule 12(b)(1) motion to a Rule 56 motion and GRANT him SUMMARY JUDGMENT.  Furthermore, in light of the need to discourage the abuse of the statutory remedies for copyright infringement, I exercise my discretion under Section 505 of the Copyright Act and ORDER that Righthaven shall reimburse Mr. Wolf’s full costs in defending this action, including reasonable attorney fees. [emphasis added]

More coverage from Ars Technica, Techdirt, and the EFF (h/t).

Righthaven “nearing bankruptcy”

I was suspicious several days ago when I heard that Righthaven might be going under, but apparently it’s true:

The Las Vegas copyright-trolling firm Righthaven told a Nevada federal judge Friday it might file for bankruptcy protection, or cease operations altogether.

To prevent that, Righthaven is asking U.S. District Judge Philip Pro to stay his decision requiring Righthaven pay $34,000 in legal fees to an online commenter it wrongly sued for infringement.

Wired has posted Righthaven’s Motion to Stay here (pdf).  They are exceptionally candid about the economics of copyright troll litigation:

In Colorado, 35 Righthaven copyright infringement cases have been stayed since May 19, 2011 pending a ruling on whether the company has standing to maintain these actions. Likewise, ten infringement actions, most of which involve an amended version of the SAA that addresses the concerns expressed by this Court in its subject matter decision, have been stayed in this District until a standing determination is made. Thus, Righthaven has been precluded from actively litigating and resolving the stayed cases. Moreover, Righthaven has delayed filing new copyright enforcement actions until a standing determination is made based upon the terms of the currently operative version of the SAA. Throughout this period, and despite a lack of incoming revenue given that numerous pending action are stayed, Righthaven has continued to incur operating expenses.

Clearly, Righthaven is a cash-poor outlet these days.  And here’s where things get really interesting:  based on its motion, Righthaven seems deathly afraid that they might have to sell some of their assets to satisfy a $34,000 judgment.  As they explain to the court:

Righthaven also has significant proprietary rights in its copyright infringement search engine software (the “Software”), which plays an integral role in the company’s operations. If a stay is not granted pending appeal, this valuable Software may be seized and liquidated in an attempt to satisfy the Judgment. Liquidation may result in the Software being sold to a competing organization or entity.

Talk about woeful undercapitalization.  A $34,000 judgment is going to force them into selling off their core business assets?  Really?

Righthaven always presented defendants in its copyright litigation with an unfair dilemma:

(1) pay out a few thousand in “go away” money now, or
(2) mount an actual legal defense (at an initial, minimum cost of a few thousand, with no guarantees that things would work out well).

It seems that Righthaven now faces a dilemma of its own:

(1) raise enough capital to pay off this $34,000 pending appeal, or
(2) go bankrupt.

The difference, of course, is that the dilemma Righthaven faces is fair.  They put defendants to the expense of hiring lawyers.  Some of those defendants won.  The law says that those winning defendants should have their legal expenses paid by Righthaven.  Sounds about right to me.  If Righthaven can’t afford to pay without selling assets, perhaps they never should have been filing lawsuits in the first place.