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The Demise of RDA's - David Kupetz

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Session #1 the Demise of RDA's: An Opportunity to Restore Fiscal Health with a Vision for Future Economic Development.

Session #1 the Demise of RDA's: An Opportunity to Restore Fiscal Health with a Vision for Future Economic Development.

Published in: Business, Economy & Finance

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  • 1. The Demise of RDAs: An Opportunityto Restore Fiscal Health with a Vision for Future Economic Development California Contract Cities Association Annual Municipal Seminar Indian Wells, California May 18, 2012
  • 2. Municipalities Under Financial Stress: The Need for a Proactive Approach David S. Kupetz SulmeyerKupetz 333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR LOS ANGELES, CALIFORNIA 90071-1406 DIRECT DIAL 213-617-5274 FAX 213-629-4520 dkupetz@sulmeyerlaw.com www.sulmeyerlaw.com
  • 3. Seizing the Opportunity to Restore Financial Health• Before the demise of Redevelopment Agencies, many California cities already faced serious financial issues, including budget shortfalls and pension underfunding• On top of unaddressed pre-existing financial realities, RDA dissolution may push some cities to the brink of insolvency• In order to avoid going over the brink, it is important that cities proactively address these realities and use the demise of RDAs as an opportunity to maintain or revive their fiscal health
  • 4. Evaluation Needed• Careful and prompt evaluation of the city’s ability to reduce costs and increase revenues is imperative• Considering reductions in force, services, infrastructure spending, employee benefits, pension obligations, outsourcing, and other means of cost cutting is necessary• Analysis of monetizing assets, taxes, assessments, bonds, fees, possible retention of former RDA assets, and other alternatives to enhance revenues is needed
  • 5. Shadow of Chapter 9• At the same time that opportunities to reduce costs and increase revenues are being examined, for cities in severe financial straits, debt restructuring, moratoriums, and adjustment are potential solutions that may need to be explored• Such exploration takes place in the shadow of Chapter 9 of the Bankruptcy Code
  • 6. AB 506• AB 506 requires municipal debtors to engage in “neutral evaluation” (mediation) before being eligible to file for Chapter 9, except in the case of a declared fiscal emergency• AB 506 was largely promoted by government employee unions and earlier versions of the legislation severely restricted a municipality’s ability to enter Chapter 9 as a last resort for financial reorganization
  • 7. AB 1692• Seeks to unravel key features of last year’s agreement on AB 506• Would revert to concepts that were advanced in earlier versions of AB 506 which local governments strongly opposed
  • 8. AB 1692• Proposed changes to AB 506 – Removes references to mandatory mediation and “mediator” as terms that describe the neutral party – Seeks to empower the neutral evaluator with independent decision-making authority – Changes the circumstances under which the mediation may be continued/extended by removing the required concurrence by the affected local public entity
  • 9. Initial Application of AB 506• AB 506 has been invoked twice so far: – City of Stockton – Town of Mammoth Lakes
  • 10. Maintaining Flexibility: Avoiding the Brink• Preserve General Fund Liquidity• Identify unrestricted fund balances held in other funds• Develop plan for lower service level scenarios• Develop plan for alternative delivery approaches to further reduce costs
  • 11. Maintaining Flexibility: Avoiding the Breach• Develop multi-year forecasts for all funds• Analyze projected costs of services and opportunities for generating fees• Evaluate cost recovery opportunities that might result in additional revenue to aid in the restoration of needed services
  • 12. Maintaining Flexibility: Avoiding the Brink• Consider voter polling to gauge support for augmenting existing revenue sources• Debt restructuring – outside of Court, if possible
  • 13. Chapter 9 Eligibility• Unlike Chapter 11, Chapter 9 has significant eligibility requirements• This is largely because Chapter 9 is designed for limited use as a last resort• Municipality must be insolvent (not paying undisputed debts as they come due or unable to pay its debts as they come due) and desire to effect a plan to adjust its debts
  • 14. Chapter 9 Eligibility• Municipality must either obtain agreement of at least a majority in an amount of each impaired creditor class, negotiate in good faith with creditors, be unable to negotiate with creditors or reasonably believe that a creditor may attempt to obtain a preference• Municipality must be specifically authorized by state law to commence a Chapter 9 case
  • 15. California’s Authorization for Chapter 9 Filings• Chapter 9 filings are authorized in the California Government Code (Government Code § 53760- 53760.7)• After three years of legislative wrangling and significant compromise, AB 506 was enacted (effective January 1, 2012)
  • 16. Purpose of Chapter 9• Chapter 9 provides a framework for eligible governmental entities to restructure debt• Chapter 9 was drafted solely for municipalities
  • 17. Purpose of Chapter 9• Not unlike Chapter 11 bankruptcy reorganization for non-governmental entities, the two main benefits of Chapter 9 are: (1) the breathing spell provided by the automatic stay and (2) the ability to adjust debts through a plan (plan of debt adjustment)• The goal of a Chapter 9 case is confirmation of a plan of debt adjustment
  • 18. Chapter 9 Process• Chapter 9 is designed to be used as a last resort to allow insolvent local public entities enough flexibility to remain viable• The Bankruptcy Court cannot interfere with the municipalitys ability to continue its operations or dictate what type of services or level of services the governmental entity may provide
  • 19. Chapter 9 Process• Municipalities are permitted to adjust burdensome contractual relationships under the power to reject executory contacts and unexpired leases, subject to court approval• Municipalities may also reject collective bargaining agreements and retiree benefit plans
  • 20. Chapter 9 Process• Creditors cannot expect that all excess cash go to the payment of their claims under a Chapter 9 plan• The municipality must retain sufficient funds from which to operate, make necessary improvements and maintain its facilities and assets, and continue to fulfill its governmental responsibilities