NEW ORLEANS - Hillview, Ky., filed a motion to dismiss its Chapter 9 bankruptcy case Thursday after a lower court approved the city's settlement with creditor Truck America.
The settlement may prove unaffordable for the city in the long run, Moody's Investors Service said in a comment Friday.
"Escalating fixed costs with the settlement could challenge the city's financial and operational flexibility and require tax increases to remain solvent," said analyst Nathan Phelps. "Spending cuts, job growth or increasing property values could, however, provide relief."
Hillview owes Truck America $15.23 million from a court-ordered judgment it lost over a soured legal dispute involving a contract to purchase city land.
In August, the city filed for bankruptcy contending that settlement negotiations failed and that the city would be insolvent if it paid the claim. Negotiations resumed this year.
Under the settlement, Hillview will issue $5 million of general obligation bonds using the proceeds to pay a portion of its obligation to Truck America.
The city will also pay Truck America 8.3% of "eligible" gross general fund revenues each year for 20 years after raising its occupational tax to 1.8% from 1.5% and increasing its insurance premium tax to 7% from 5%.
Amounts necessary to pay debt service, $50,000 for an emergency reserve, and certain restricted grants are exempt from the gross revenue calculation.
Hillview would benefit from the settlement by reducing the amount it owes Truck America by approximately $5 million, an estimate based on fiscal 2015 eligible revenues over a 20-year time frame and proceeds from the bond issuance, according to Moody's.
However, the payments would significantly increase the city's fixed costs.
The additional cash flow from the eligible deductions and required payments to Truck America would have increased the city's fixed costs to $1.3 million, or 41% of general fund revenues in fiscal 2015, said Moody's, which once rated the city's GOs.
By comparison, Hillview's existing fixed costs, including debt service and pension contributions, were $558,000 in fiscal 2015, or 17.6% of revenues.
Moody's also said the settlement marks a missed opportunity to gain additional insight into whether a municipality facing a crushing legal decision can claim insolvency as a condition of filing for bankruptcy.
The bankruptcy court took testimony late last year on whether the city was insolvent, although a ruling was not issued.
Hillview will advertise notices about its plan to drop the bankruptcy case over the next three weeks before Bankruptcy Judge Alan C. Stout rules on the motion to dismiss.
On Tuesday, Standard & Poor's upgraded its ratings to BBB from B-minus on the city's 2010 GO bonds based on a review of the legal settlement.
