ORANGE COUNTY IN BANKRUPTCY: Q & A : Ramifications of a Chapter 9 Bankruptcy Filing
Orange County’s bankruptcy filing raises questions about what effect it will have on basic government services such as police and fire protection, on county employees’ paychecks and on whether property owners should pay their property taxes due Monday.
Chicago lawyer James E. Spiotto, a partner in the firm of Chapman & Cutler, has handled several municipal bankruptcy filings and has testified before Congress regarding this type of bankruptcy. In an interview Tuesday, he explained the ramifications of the move:
Question: What is Chapter 9?
Answer: Chapter 9 lets a municipal government adjust and rearrange its debt, not eliminate it. It recognizes its inability with its current revenues to repay its debts over a reasonable period of time.
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Q: How will it affect the average Orange County resident or government employee?
A: For the average employee or creditor, any past-due wages or money owed would not be paid until after the filing of the bankruptcy reorganization plan, unless the court specifically orders otherwise. In addition, the only bond debt paid during the bankruptcy would be special revenue bonds, which are specifically defined in the bankruptcy code as special taxes dedicated to payment of revenue bonds. It would not include any bonds payable from general sales taxes, property taxes or income taxes.
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Q: Do people who depend on their bonds for income have any recourse?
A: Any municipal debt has some market. The price of those bonds may significantly drop to the point they would be considered unattractive to sell. It’s always important, not only for Orange County but for all municipalities, that people carefully assess the situation and find a quick and effective situation that maximizes value to all and provides the least amount of pain to the county, its citizens and its creditors. (Most California bond mutual funds are diversified, with potentially troubled Orange County bonds a small percentage of assets. Also, many of the bonds are insured.)
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Q: Will companies that do business with the county be paid?
A: Those who supply services to the county, for any obligation owed to them prior to the date of filing, that claim would be part of the bankruptcy. From the date of the petition and thereafter, those companies would be paid on a regular basis.
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Q: Will police, fire or other emergency services be affected?
A: The county should be able to provide the same services.
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Q: Should I pay my property taxes?
A: Even though a county files for bankruptcy protection, it still has the right to receive payment of taxes.
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Q: How many cities, counties or districts have filed for Chapter 9?
A: From 1937 to 1993, there have been 475. By and large, these have been small special tax districts or small municipalities. For example, between 1937 and 1972, there were 362 municipalities involving $217 million worth of debt. They paid back over $140 million of that debt.
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Q: What was the largest?
A: The largest since the Great Depression was the city of Bridgeport, Conn., in 1991, which was dismissed by the Bankruptcy Court because it was found not to be insolvent.
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Q: So Orange County becomes the largest?
A: Bridgeport had over $200 million in bond debt and 150,000 population. Orange County is obviously larger.
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Q: Can the court deny Orange County’s bankruptcy petition?
A: There may be motions to dismiss filed for a number of reasons. They may question whether the municipality is insolvent. They may question, like in the Bridgeport case, whether the county has specific authority under state law.
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Q: Will county employees be paid on time?
A: Going forward from the time the county filed, they will be paid. But any wages owed prior to the date of filing would remain unpaid until the Plan of Adjustment (as the bankruptcy reorganization plan is known).
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Q: How long does it usually take for filing of the Plan of Adjustment?
A: It is subject to negotiation between the government and its creditors. It is usually measured by months, instead of days or weeks.
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Q: Do the largest creditors receive priority?
A: The largest priority claims will be paid during the course of the bankruptcy. The government reserves control over its revenue, property and political affairs and operations. The largest creditors will be paid based on priority, same as the people in their class.
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Q: What kind of ill effects are caused by a bankruptcy filing?
A: The biggest problem is the stigma of bankruptcy in the bond market, either because a municipality has to pay higher interest rates or because it cannot obtain any credit in the market.
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Q: How long does that stigma last?
A: It depends on how people perceive the problem. If people are afraid that this could be a serious problem, they may ask for higher interest rates or not participate in a future debt offering, making it so it can’t proceed. That’s why in many troubled municipal situations, you have a refinancing authority or an oversight committee or state agency which may guarantee or provide an additional source of revenue.
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Q: How do those oversight boards work?
A: Usually by state legislation to provide additional credit reporting and guidance to a municipality in a (debt) work-out situation.
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Q: Why have so few local governments ever filed for bankruptcy?
A: The market still looks to the credit-worthiness and believability of that issuer. And municipalities have been always worried about the stigma of bankruptcy, the cost of bankruptcy in the future, high interest-rate charges or the lack of ability to borrow.
