BRADENTON, Fla. — Hillview, Ky.'s bankruptcy filing offers more evidence that municipalities increasingly consider filing for reorganization as a way to cure balance-sheet problems, according to Moody's Investors Service.
Filing for Chapter 9 bankruptcy after incurring an adverse legal judgment is a credit negative for the Hillview and the entire local government sector, Moody's analyst Nathan Phelps said in a report Monday.
Hillview has $3.17 million of outstanding general obligation bonds that are not rated by Moody's; nor has the city defaulted on its payments.
Moody's said other municipalities sought bankruptcy after incurring legal judgments, including the Town of Mammoth Lakes, Calif., Boise County, Idaho, and the Township of Westfall, Pa.
Hillview's total debt, including the legal judgment, is equal to 40 times the city's $347,000 unassigned general fund balance as of June 30, 2104. The city still may face difficulties proving insolvency in court because it has options for dealing with the adverse ruling, Moody's said.
"Although the legal judgment is 4.5 times the city's fiscal 2014 general fund revenues of $2.5 million, the city under state law can issue bonds to pay for losses in legal judgments, and Kentucky courts can order periodic payment of the judgment over a period not to exceed 10 years," said Phelps.
Phelps also said that Hillview has the ability to increase its two largest sources of operating revenue without violating restrictions. Those sources of revenue are the city's occupational license taxes, which accounted for 50% of general fund revenues in fiscal 2014, and property taxes, which constituted 30% of revenues.
"Kentucky courts have held that local governments can exceed the maximum tax rate to pay debt service on general obligation bonds, providing a local government did not exceed the maximum tax rate at the time of the bond sale," he said.
Hillview filed for protection from creditors on Aug. 20, and plans to pay its bond debt, City Attorney Tammy Baker told The Bond Buyer last week.
The petition was filed to stop $3,759 in daily interest from accruing as a result of an $11.4 million judgment against the municipality, she said.
The judgment now totals $15 million, according to
Hillview lost a lawsuit with the firm Truck America Training LLC that began in 2005 in a dispute over the sale of a property.
The breach of contract suit became final earlier this year. The city did not have insurance to cover its cost.
In Friday's filing, Hillview's attorneys said that the city qualifies to have its petition for bankruptcy accepted in part because the city is insolvent, and cannot pay the judgment, which it believes is currently due in full.
The city, it said in the filing, also negotiated in good faith with Truck America, but failed to reach a settlement after a period of negotiations and a separate mediation, led by Stephen Rhodes, the retired bankruptcy judge who presided over Detroit's Chapter 9 case.
In connection with the mediation, the city deeded the disputed property to the company along with a payment of $65,300, the filing said.
After making the payment and deeding the property to the company, Hillview said it was to receive an $815,300 credit against the judgment but a final agreement could not be reached on how the remaining judgment would be paid, according to the filing.
"The city has developed general parameters for a plan which it believes can reasonably be satisfied," court documents said. "The city desires to effect such a plan through this bankruptcy case."
No details were given about the city's proposed plan of adjustment.
On Friday, attorneys for Truck America filed a motion seeking an examination of certain city documents.
The company said the documents could be used to contest Hillview's bankruptcy petition and its plan of adjustment.
The first hearing in the case is scheduled for Tuesday to set deadlines and procedures for creditors that want to file objections to the city's petition.
