PUERTO RICO
In a week full of events challenging the Commonwealth and creditors alike, the resignation of Governor Rosello effective August 2 was the biggest. His successor at least temporarily was expected to be the secretary of justice, Wanda Vázquez. Ms. Vázquez was next in line under the commonwealth’s Constitution because the secretary of state, who would have succeeded Mr. Rosselló as governor, resigned last week . Mr. Rosselló is the first chief executive to step down during a term since Puerto Ricans started electing their governors in 1947. Now, however, Ms. Vazquez has said that she will not accept appointment to the job.
The line of succession after the position of Secretary of State snakes its way along an unclear path through the remaining Cabinet Secretaries. With this backdrop, some 60 community organizations presented a letter to U.S. District Judge Laura Taylor Swain, requesting that the ongoing bankruptcy proceedings over the island’s debt be stayed until Puerto Rico stabilizes and a comprehensive audit of its debt has begun. Judge Swain is reported in the local press to have granted the petition and halted all adversary cases and claims against the government for 120 days.
After all, it is not clear who will be the governor of the Commonwealth during this later phase of the Title III proceedings. The Governor has resigned. The Fiscal Control Board is in a process of being challenged in court. The designated successor is not in place. The outgoing governor would have to nominate that person to be his secretary of state. It is not at all clear who legitimately represents the island’s citizens.
BURLINGTON BROADBAND
Burlington, VT was one of the first municipalities to finance, own, and operate a combined telecommunications utility.
On March 13, 2019, the city closed on the sale of Burlington Telecom (“BT”), a telecommunications business previously operated by the city, to Champlain Broadband, LLC, an affiliate of Schurz Communications, Inc. (the “Purchaser”). The sale of BT to the Purchaser was approved by the City Council of the Issuer on December 27, 2017, and regulatory approval for the sale was received from the Vermont Public Utility Commission on February 19, 2019. The Issuer received approximately $7 million from the sale.
The sale also resolved outstanding litigation which had threatened the city’s financial position. In late 2009, it became publicly known that BT was unable to make payments on the City’s $33.5 million lease with Citibank or return $17 million of City general fund dollars improperly spent on BT by the prior administration. These events resulted in a federal lawsuit with Citibank, six steps of downgrades in the City’s credit rating from 2010 to 2012, and a lack of liquidity that put the City’s continued operations of core municipal functions at risk.
The settlement, according to the City brought full and final resolution to the $33.5+ million Burlington Telecom lawsuit with Citibank, as until today’s closing, Citibank retained the ability to re-open its lawsuit; Citibank’s full release of the City from further BT liability is attached. It recovered at least $6.97 million of the $17 million improperly spent by the City prior to 2010 (an additional recovery of up to $500,000 in the future is possible) In addition, the City retains ownership of the building that houses Burlington Telecom and will begin receiving rental payments of $115,000 a year and tax payments of $18,000 annually.
At the time of closing, the City said that it had ensured that the City’s financial recovery and improved credit rating will continue. They were quite right about that. Moody’s just announced that it upgraded to Aa3 from A2 the rating on the City of Burlington, Vermont’s outstanding general obligation unlimited tax (GOULT) bonds. It specifically referenced the settlement of the litigation.
ILLINOIS BOND CHALLENGE
For years, individuals in several states have fought efforts by states to issue debt without some form of direct voter authorization. For a generation of municipal analysts, the name Schultz will forever be associated with numerous legal actions seeking to halt the issuance of various issues of bonds which were not subject to voter approval in New York State. The litigation is strewn across three decades. It should be noted that the suits ultimately were found in favor of the state.
The latest such effort is now occurring in Illinois. A hedge fund and the chief executive officer of a conservative think tank he filed suit in Sangamon County, IL circuit court alleging that bonds issued in 2003 to fund pensions and in 2017 to fund backlogged payments are deficit financing bonds which e plaintiffs assert are illegal. They seek to invalidate up to $14.3 billion of bonds.
One thing that always fascinates is the view of hedge funds versus what their role is in a given transaction. It does not favor investors if debt can be invalidated some 16 years after issuance. It is insistence on respect for the validity of issued debt that has hedge funds portrayed as bad guys in the Puerto Rico restructuring. Now, a hedge fund is essentially taking the other side. So they are not consistent and heir position doesn’t make sense.
In the case of the think tank plaintiff, the political animus of the CEO towards the Democrats in the state legislature is well established. The Illinois Policy Institute backed an Illinois employee named Mark Janus in his challenge to the constitutionality of mandatory union fees. In 2014, the institute helped defeat a movement to amend the Illinois Constitution and replace the state’s flat income tax with a progressive income tax. Voters will have a chance to vote on the income tax in 2020. They are expected to vigorously oppose the proposed income tax changes.
The institute faces the reality that it will be very difficult to reduce pension liabilities in the near term. If the state ceases making principal and interest payments on the debt it could contribute an additional $13 billion to its pensions over the next 14 years, according to the complaint. So this is their fallback.
As is the case often, this one relies on the parsing of words. Article nine, section nine of the Illinois Constitution says the state may issue long-term debt only to finance “specific purposes” if approved by three-fifths of the legislature or by popular referendum. Using bond money to cover general expenses, speculate in the market, or pay past-due bills isn’t a “specific purpose” for incurring state debt, but rather another name for deficit financing, the complaint said.
WHO SAYS TECHNOLOGICAL CHANGE ONLY CREATES GREAT JOBS?
We came across a fascinating story this week about the expansion of an industry as the result f disruptive technological change in the transportation space. it’s not what you think. It’s the expansion of the repossession industry into the electric scooter space. There is a real company in San Diego called ScootScoop. They are paid by business owners and landlords who are fed up with the deluge of dockless two-wheelers. It is a two man operation with a yard for scooter storage and a tow truck. ScootScoop charges the scooter companies $30 for pick-up and an additional $2 for each day that the scooter is in storage, capping the daily fees off after a month.
It hasn’t gone all smoothly. A lawsuit was filed in California Superior Court in late March which accused the company of improperly impounding Bird’s scooters and then “ransoming” them back to the $2 billion company. Lime filed a nearly identical suit soon after.
Many observers have wryly noted that the scooter companies are relying on the California Vehicle Code. The scooter companies have fought every attempt to enforce regulation of their industry under the same code. Others respond more strongly. A federal lawsuit has been filed by a disability rights group against Bird, Lime, Razor, and the City of San Diego. It claims that scooters are being left in front of wheelchair ramps, curbs, and crosswalks.
It is all part of the battle for control over the streets and the revenue which can be derived from them. On July 1st, the City of San Diego – one the defendants – implemented new regulations to address the scooter complaints. They require scooter companies to obtain insurance policies, free the city from all legal liability, cap speeds on the boardwalk, and obtain permits for every scooter in circulation.
LONG TIME MUNICIPAL UTILITY UP FOR PRIVATIZATION
The Jacksonville, FL Electric Authority (JEA) board voted to give its CEO the authority to explore methods of privatizing JEA, including becoming a privately held or investor-owned company; evaluating an initial public offering making JEA a publicly traded company; or converting into a customer-owned utility. Privatization is one potential solutions to shrinking energy sales and declining revenue due to increases in energy efficiency and falling costs of home generation of renewable energy.
The board chose from among a series of alternatives. One scenario detailed in May would have put in place a 52% electric rate increase, a 15% rise in water rates and a reduction in JEA’s city contribution from a projected $118 million in fiscal year 2020 to nothing by 2023. Scenario 2, or a “traditional utility response,” would have cut 574 jobs at JEA and raised electric rates 26% by 2030.
The vote also retains a $72.2 million plan between JEA and Ryan Companies US Inc. to build a high-rise headquarters in Downtown Jacksonville for the city-owned utility. JEA would then lease the building from the private builder. City Council approved the on June 25, effectively simultaneously with a JEA’s board vote to enter into the lease
The CEO has predicted that researching the options for privatization will take six to nine months. Should the board decide to sell JEA assets in a sale or competitive solicitation, it would require additional board action, approval by council and a voter referendum. The CEO is on record that a privatization would have to provide the city $3 billion as a supplement to future JEA annual contributions, give $400 million to customers as a rebate, guarantee a 3-year contractual rate, fund and provide the city and the Duval County Public Schools with 100% renewable energy by 2030; fund and provide 40 million gallons daily of alternative water capacity for Northeast Florida by 2035.
It would also have to guarantee protection of certain employee retirement benefits; maintain employee compensation and benefits for three years; make retention payments to all full-time employees at 100% of their current base compensation, and maintain the agreement to lease a new headquarters and retain employees in Downtown Jacksonville. The board also approved the introduction of legislation to council to revise employee pensions. The resolution would guarantee that all current employees receive full retirement benefits in the event of privatization.
It is not clear how much support a privatization has. The mayor said in April 2018 he would not submit a proposal to council to privatize JEA. He said he would not support a decision by the JEA board that would lead to “hundreds of job cuts or failure to meet the retirement needs of career employees.”
“As a publicly owned asset, the value of JEA is built on the investment of taxpayers. Any policy regarding the utility’s future must respect that investment. Jacksonville taxpayers are co-owners of the utility and must have a voice in the future of their investment,”
A private buyer would have to redeem the JEA’s outstanding debt in the event of a sale.
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