What The Government Cant Do For You: Bankruptcy

Showing posts with label Bankruptcy. Show all posts

Monday, April 1, 2013

Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith

Today a judge ruled that the city of Stockton California is indeed bankrupt and that the city acted in good faith. Creditors asked the judge to void the bankruptcy, saying the city could raise taxes instead.

I have been watching this story for a while. Here is some background on the Stockton bankruptcy as reported by Arizona Central.

By outward appearances, Stockton, a city of nearly 300,000 on the Sacramento-San Joaquin River Delta, seemed in the mid-2000s to be emerging from decades of struggle.
After the city’s population grew by nearly 20 percent between 2000 and 2005 and real estate tripled in value, home prices plummeted 40 percent the following year before bottoming out at 70 percent.

Within two years, Stockton had accumulated nearly $ 1 billion in debt on civic improvements, money owed to pay pension contributions and the most generous health care benefits in the state — coverage for life for all retirees plus a dependent no matter how long they had worked for the city.

By 2009, the city began slashing its budget to stay afloat. The police department lost 25 percent of its 441 sworn officers and the fire department was cut by 30 percent. City staff was cut by 40 percent. The city general fund budget, now $ 155 million, has been cut by $ 90 million over three years.

The impacts were felt everywhere. Wells Fargo bank seized three parking garages when the city defaulted on the $ 32 million in bonds that financed them. Bond holders also seized the $ 40 million downtown high rise that was to become City Hall.

Last summer, the city began negotiating with creditors, a requirement before entering bankruptcy. Ten employee unions agreed to temporary wage and benefits cuts.

Retired employees have also been asked to pick up a larger share of health care premiums, closing a $ 540 million retiree health care cost liability.

But the holders of the biggest share of the debt were the companies that in 2007 insured nearly $ 165 million in pension bond obligations to allow the city a lower interest rate and make them stable for investors. They were unable to negotiate a deal and want the city to avoid bankruptcy, which would likely allow Stockton to avoid repaying the debts in full.

City Acted in Good Faith

Today, Bloomberg reports a Judge Decided City Acted in Good Faith, Creditors Didn’t

The judge in a trial over whether the city of Stockton, California, can stay in bankruptcy said he found that the city negotiated in good faith with its creditors, and that the creditors didn’t.
Creditors, including Assured Guaranty Corp. and Franklin Resources Inc. (BEN) had argued that Stockton didn’t qualify for bankruptcy because the city isn’t truly insolvent, and that its leaders didn’t negotiate a potential settlement in good faith.

Negotiation is a “two way street,” said U.S. Bankruptcy Judge Christopher M. Klein in Sacramento, addressing creditors who he said didn’t negotiate in good faith. “You cannot negotiate with a stone wall.”

In the course of the hearing today, Klein has also said that the city’s witnesses were credible and that the city was “by any measure” insolvent when it filed for protection from creditors.

The city is slated to stop paying for retiree health care on June 30 as part of a spending plan the City Council approved in June, citing a $ 417 million unfunded liability. The benefit had allowed workers employed as little as a month to receive city-paid health coverage for life, for both the employee and his or her spouse, Bob Deis, the city’s manager said.

Stockton’s unemployment rate was 18.7 percent in January, almost twice the state jobless rate of 9.8 percent, according to the California Employment Development Department. The national unemployment level that month was 7.9 percent, according to U.S. Labor Department data.

This was a good ruling. The city is of course bankrupt and taxpayers should not have to pay for it more than they already have.

Once again the main problem was untenable salaries for public unions and city workers. The housing crash simply brought the crisis to a head sooner.

In addition to reduced healthcare benefits, the pension plan should be scrapped as well, but don’t expect city officials to cut their own throats no matter how much they deserve it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mish’s Global Economic Trend Analysis

Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith

I have been watching this story for a while. Here is some background on the Stockton bankruptcy as reported by Arizona Central.

By outward appearances, Stockton, a city of nearly 300,000 on the Sacramento-San Joaquin River Delta, seemed in the mid-2000s to be emerging from decades of struggle.
After the city’s population grew by nearly 20 percent between 2000 and 2005 and real estate tripled in value, home prices plummeted 40 percent the following year before bottoming out at 70 percent.

Within two years, Stockton had accumulated nearly $ 1 billion in debt on civic improvements, money owed to pay pension contributions and the most generous health care benefits in the state — coverage for life for all retirees plus a dependent no matter how long they had worked for the city.

By 2009, the city began slashing its budget to stay afloat. The police department lost 25 percent of its 441 sworn officers and the fire department was cut by 30 percent. City staff was cut by 40 percent. The city general fund budget, now $ 155 million, has been cut by $ 90 million over three years.

The impacts were felt everywhere. Wells Fargo bank seized three parking garages when the city defaulted on the $ 32 million in bonds that financed them. Bond holders also seized the $ 40 million downtown high rise that was to become City Hall.

Last summer, the city began negotiating with creditors, a requirement before entering bankruptcy. Ten employee unions agreed to temporary wage and benefits cuts.

Retired employees have also been asked to pick up a larger share of health care premiums, closing a $ 540 million retiree health care cost liability.

But the holders of the biggest share of the debt were the companies that in 2007 insured nearly $ 165 million in pension bond obligations to allow the city a lower interest rate and make them stable for investors. They were unable to negotiate a deal and want the city to avoid bankruptcy, which would likely allow Stockton to avoid repaying the debts in full.

City Acted in Good Faith

Today, Bloomberg reports a Judge Decided City Acted in Good Faith, Creditors Didn’t

The judge in a trial over whether the city of Stockton, California, can stay in bankruptcy said he found that the city negotiated in good faith with its creditors, and that the creditors didn’t.
Creditors, including Assured Guaranty Corp. and Franklin Resources Inc. (BEN) had argued that Stockton didn’t qualify for bankruptcy because the city isn’t truly insolvent, and that its leaders didn’t negotiate a potential settlement in good faith.

Negotiation is a “two way street,” said U.S. Bankruptcy Judge Christopher M. Klein in Sacramento, addressing creditors who he said didn’t negotiate in good faith. “You cannot negotiate with a stone wall.”

In the course of the hearing today, Klein has also said that the city’s witnesses were credible and that the city was “by any measure” insolvent when it filed for protection from creditors.

The city is slated to stop paying for retiree health care on June 30 as part of a spending plan the City Council approved in June, citing a $ 417 million unfunded liability. The benefit had allowed workers employed as little as a month to receive city-paid health coverage for life, for both the employee and his or her spouse, Bob Deis, the city’s manager said.

Stockton’s unemployment rate was 18.7 percent in January, almost twice the state jobless rate of 9.8 percent, according to the California Employment Development Department. The national unemployment level that month was 7.9 percent, according to U.S. Labor Department data.

This was a good ruling. The city is of course bankrupt and taxpayers should not have to pay for it more than they already have.

Once again the main problem was untenable salaries for public unions and city workers. The housing crash simply brought the crisis to a head sooner.

In addition to reduced healthcare benefits, the pension plan should be scrapped as well, but don’t expect city officials to cut their own throats no matter how much they deserve it.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mish’s Global Economic Trend Analysis

Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith

Wednesday, March 13, 2013

UK Banruptcy Tzar On Verge Of Bankruptcy

Despite around $ 135 million in bailouts, the UK government’s Insolvency Service disputes its own insolvency. The FT reports that one British MP summed it up – “it is fair to say that if this was a company it would be in deep trouble.” The group, which polices bankrupt companies, liquidates failed businesses and disqualifies unfit directors, would be bankrupt were it not for the government’s cash injection. Dependent on fees and recoveries from bankrupt companies, the agency over-estimated its ability to recover assets from collapsed businesses. It dismisses the insolvency claims against itself however, noting the service is “living within its means” and expects to be deficit-free by 2015 (though it is unclear how unless they expect recoveries to rise dramatically or bankruptcies to increase significantly) as it is forced to provide services even when there is no prospect of recovering fees from bankrupt people or companies. Their rate of prosecution has dropped from 40% to 21% and even the creditor community has lost faith arguing that the agency’s model was “unreliable in the current economic climate” and required urgent reform.

Via The FT,

The UK government’s Insolvency Service is all but insolvent.

Experts suggest the group, which polices bankrupt companies, liquidates failed businesses and disqualifies unfit directors, would be broke had it not received an emergency injection of cash from the government.

…

“It is fair to say that if this was a company it would be in deep trouble,” said Adrian Bailey, chair of the parliamentary business committee.

The Insolvency Service is dependent on fees and asset recoveries from bankrupt companies and the annual number of bankruptcies has fallen sharply over recent years. Official receivers dealt with 43,594 new cases in the 2011-12 fiscal year compared with 77,898 received in 2009-10.

The agency overestimated its ability to recover assets from collapsed businesses through its receivers, known as the Official Receivers.

…

The Insolvency Service said it was having to “live within its means” because of the drop in case numbers. It has merged its regional offices and cut its headcount by 500, with up to 400 more job cuts in the next three years. “With this strategy in place the service anticipates to be deficit-free by 2015,” it said.

While costs at the agency have been slashed by £60m since December 2009, it is hamstrung by its obligation to provide services even when there is no prospect of recovering fees from bankrupt people or companies.

The Insolvency Service disputes that it is “insolvent” given that it holds £14m of cash on its balance sheet. It has, however, required £89m of rescue cash from the business department (BIS) between 2008 and 2012.

…

“My concern is that the rate of prosecution, which was 40 per cent of those reported a decade ago, is now down to 21 per cent because the IS is under-resourced,” he said.

“The creditor community is upset because usually, if they don’t get their money back, at least they have the satisfaction that the person has been banned as a director for a number of years… that’s now less likely.”

Zero Hedge

UK Banruptcy Tzar On Verge Of Bankruptcy

Saturday, February 23, 2013

Half of Detroit Properties Have Not Paid Taxes; Update on Detroit Bankruptcy

The hollowing out of Detroit is nearly complete. All that’s left is a bankrupt shell of a city with no services and scattered citizens that do not pay taxes.

The Detroit News reports Half of Detroit Property Owners Don’t Pay Taxes

Nearly half of the owners of Detroit’s 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.
The News reviewed more than 200,000 pages of tax documents and found that 47 percent of the city’s taxable parcels are delinquent on their 2011 bills. Some $ 246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.

Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found. Many of those who don’t pay question why they should in a city that struggles to light its streets or keep police on them.

“Why pay taxes?” asked Fred Phillips, who owes more than $ 2,600 on his home on an east-side block where five owners paid 2011 taxes. “Why should I send them taxes when they aren’t supplying services? It is sickening. … Every time I see the tax bill come, I think about the times we called and nobody came.”

Update on Detroit Bankruptcy

Detroit is financially and morally bankrupt yet the governor refuses to make that declaration. A Review team says Detroit faces financial crisis, has no plan to fix it so why won’t the governor act?

For the second time in a year, a state review team has found Detroit is in a financial emergency that requires Gov. Rick Snyder to intervene in City Hall.
But this time, if Snyder agrees that a financial emergency exists, the governor’s choices are more limited. He could appoint an emergency manager to keep Michigan’s largest city from plunging into bankruptcy, experts say, or he could continue state financial supervision through a new consent agreement, which seems a faint possibility.

State Treasurer Andy Dillon ruled out a bankruptcy filing at this time.

The six-member review team unanimously concluded in a report released Tuesday that the city failed to restructure its debt-laden bureaucracy under the financial consent agreement signed in April and that Detroit’s financial crisis requires Snyder’s intervention “because no satisfactory plan exists to resolve a serious financial problem.”

Chapter 9 bankruptcy is “always a possibility but I don’t think the city should go through (Chapter) 9 to cure its ailments,” he added.

The review team said the city’s charter adds “numerous restrictions” and hurdles for closing departments, canceling contracts and the type of wholesale restructuring financial experts say is necessary to make city government live within its means.

Restrictions? Who Cares?

In bankruptcy, restrictions go out the window. So do union contracts and pensions. Since all of that needs to go out the window, what’s holding the governor back?

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mish’s Global Economic Trend Analysis

Half of Detroit Properties Have Not Paid Taxes; Update on Detroit Bankruptcy