While the D-word — Detroit — hovers over municipal finance, market observers say no Motor City scenarios are on the Northeast horizon and some situations have improved, notably in Pennsylvania and Rhode Island.
"There's been a lot of publicity about how contentious things are in Detroit right now, and the truth is, this alternative is far superior to that," Harrisburg, Pa.'s state-appointed receiver, William Lynch, said in announcing in late February that Pennsylvania's capital would exit receivership.
Pennsylvania Gov. Tom Corbett also referenced pensions, another muni market theme.
"Pensions are creating a problem," Corbett said at the same press conference where Lynch spoke. "I was with the governor of Michigan and we talked about Detroit, and we know that everyone is watching what's going on in Detroit, and again there is one [example] where pensions are creating a problem."
Pennsylvania faces an estimated $47 billion unfunded pension liability and has received rating downgrades because of its inability to reduce it.
While the Motor City's march through Chapter 9 has become a handy reference point, some workout professionals insist that Detroit is an aberration.
"The simplest answer is that Detroit is an outlier. There's a huge sui generis case. There is a failure in many ways of political leadership," said Bill Brandt, president and chief executive of Development Specialists Inc. in Chicago and chairman of the Illinois Finance Authority.
"I've had any number of people tell me that if we don't do things right in this city or that, we'll be the next Detroit," he said. "It couldn't be farther from the truth. And I think the mess in Detroit and the way it's being handled is an object lesson in what not to do and how not to do these things."
The Northeast has some examples of striking a common ground. In Pennsylvania and Rhode Island, for instance, state involvement unseen in Michigan appears to have diffused some distress-related crises.
"I don't see any [Detroits] on my radar that are brewing. Some situations have even gotten better," said Brian Fraser, a partner with Richards Kibbe & Orbe LLP in New York.
Central Falls, Rhode Island's smallest city with a 19,000 population and an $80 million unfunded pension liability, filed for bankruptcy in August 2011 and exited 13 months later. Rhode Island's legislature helped set up the city for a smooth Chapter 9 filing by passing a law earlier that year that made payment of bondholders priority.
"One of the reasons why we're so close to exiting bankruptcy is the extra attention we've gotten from the [state] leadership. They profoundly understood the problems that a city faces," Central Falls bankruptcy counsel Ted Orson told The Bond Buyer before its exit from Chapter 9.
In 2011, Rhode Island passed a landmark law overhauling its pension system for state employees. Public-sector unions filed six lawsuits challenging the law, and after a year of mediation talks, state officials and union leaders struck a deal in February, pending legislative, court and union rank-and-file approval.
Harrisburg eventually reached that common ground, despite some moon-crater sized potholes along the road.
Late in 2011, Harrisburg's City Council filed under Chapter 9, only for federal Judge Mary France to nullify the petition. That set in motion the state-appointed receivership that Harrisburg exited in February, following court approval of Lynch's recovery plan to erase more than $600 million of debt and avoid bankruptcy.
The plan hinged on the sale of the city incinerator - ground zero in the city's financial crisis - to the Lancaster County Solid Waste Management Authority and the long-term lease of parking assets from the city and the Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority. Bond sales for both closed in late December.
A Feb. 27 report by Moody's Investors Service calculated an overall initial recovery rate of 75% for Harrisburg's general obligation debt, though recovery rates varied widely "because of political, legal and practical circumstances." Dauphin County is in line for 75% recovery, Moody's said, while incinerator operator Covanta Energy Corp. stands to get only 39%.
"I thought Harrisburg did a great job. Bondholders took a haircut but not a big haircut," said Fraser. "Along with Rhode Island, it's going to be a template for future recoveries."
According to Brandt, Harrisburg creditors in the end were pragmatic. "Nobody's planning on an avalanche of cash thereafter to make them rich," said Brandt. "The Covanta recovery was always going to be a problem. The incinerator is worth what the incinerator is worth and I think they're doing nicely at 40%."
Lynch, a retired Air Force general, was Harrisburg's second receiver. David Unkovic abruptly quit in March 2012, four months into his tenure, citing pressure from Corbett advisors and major corporate creditors.
Lynch said his biggest challenge was the city's pattern of political infighting.
"I urged everyone to take a deep breath and work on solving problems," said Lynch. "It's not really what happens to us, it's how we deal with it that makes a difference."
Lynch developed a reputation as a consensus builder, even after he won a legal battle after the City Council tried to block his proposal to double the city's earned-income tax.
"When I heard the general was coming on board, I was practicing my salute, but when he got here I realized I didn't have to use it," said Linda Thompson, Harrisburg's mayor from 2009 to 2013. "He respected [us] and worked with us as a team."
Lynch has said repeatedly that receivership also provided Harrisburg the tools to govern itself sensibly. "This is really just the beginning," he said. The plan provides for four years of balanced budgets to give the city a running start.
"There will be all kinds of problems as we implement the changes that we have made. For the new mayor, this is a little bit like changing the tire on the car while you're en route to Philadelphia going down the Turnpike," he said while glancing at Thompson's successor, Eric Papenfuse.
"The receiver did a masterful job there regionalizing the issue, getting all parties to the table and settling,' Brandt said. "Too many times I've seen in the negotiations, it's 'my way or the highway.'"
In Rhode Island, the battle over the pension law is far from over despite the Feb. 14 announcement by Gov. Lincoln Chafee and General Treasurer Gina Raimondo of a settlement. Some lawmakers who risked their political careers three years ago are reluctant to rework the bill.
Cities are also pushing back. Cranston Mayor Allan Fung, who recently closed a pension overhaul deal in his 80,000-population city, said Cranston alone will be on the hook for an additional $1 million in pension liability starting in 2016.
"The overhaul in general had the net effect of pushing a lot these pension issues down to the local government level," Brandt said of Rhode Island. "Wonderful for the state, wonderful for the state legislatures, not so much for the local cities.
"There a lot of people who stuck their necks out on this deal," Brandt said. "I think this deal will likely hold, but I do think that Cranston and Providence might be better situated than Woonsocket, for example, in the future for dealing with these issues on the local level."
