DALLAS – Bankruptcy and debt-payment defaults would seem to go hand-in-hand for municipal bond issuers.
The experience of two Texas credits shows that is not always the case.
Gainesville Hospital District, rated Ba1 by Moody’s, has never defaulted on its $19.7 million debt, despite filing for Chapter 9 bankruptcy in January.
Dallas County Schools, the transportation provider for 12 Dallas-area school districts, defaulted on a $5.3 million debt payment in June but has not sought bankruptcy protection. Nevertheless, the district could cease to exist after a voter referendum in November.
Moody’s Investors Service highlighted the distinctions between the two issuers in a recent report.
“Municipal credits seek to adjust debts through Chapter 9 bankruptcy for a variety of reasons beyond debt reduction,” Moody’s wrote. “For example, Central Falls, RI's primary motivation in filing for bankruptcy in 2011 was to significantly reduce its pension burden. Hillview, Ky., filed in 2015 looking to reduce its liability from a legal judgment.”
In the case of Gainesville Hospital District, the challenge was cash-flow relief and the need for debtor-in-possession financing. The district owed about $3.1 million in unsecured trade debts, of which more than 70% was 30 days or more past due.
“Gainesville intends to pay all its debt obligations in full, which it should be able to accomplish,” Moody’s wrote. “Since it plans to pay all obligations in full, Gainesville has faced very limited resistance from creditors and stakeholders to its bankruptcy filing.”
GHD will ask the bankruptcy court to confirm approximately $34.75 million in various non-GO liabilities, primarily pensions, as valid debts in a hearing scheduled for Aug. 21. The district would then refund the liabilities by issuing new general obligation limited tax bonds.
With a 20-year amortization, the financing would require a tax rate increase of $1 per $1,000 of assessed value, well below the $6.50 state cap.
Without help from creditors, Chapter 9 can be very expensive for municipalities, Moody’s noted, and the costs may outweigh the benefits. Texas Attorney General Ken Paxton has signed off on a plan to treat the district’s revenues in a way that favors bondholders.
The Gainesville filing was one of nine hospital bankruptcies across the country through June, according to Becker’s Hospital CFO Report.
Unlike Gainesville Hospital District, Dallas County Schools has faced fierce opposition from Texas’ Republican leadership, including Paxton, who prevented the district from refinancing its debt, thereby forcing the default.
In Texas’ 85th Legislative session that ended May 31, lawmakers approved Senate Bill 1566 that would abolish the district on Nov. 15, 2017 unless a majority of voters in Dallas County vote to preserve the district at the Nov. 7 general election.
State Sen. Don Huffines, R-Dallas, who originally sought to abolish the district by legislation alone, agreed to let voters reconsider in his bill that won final approval. Huffines introduced the bill citing local news reports detailing questionable business dealings and safety concerns.
"The Texas Legislature has acted to give voters the opportunity they deserve: the chance to abolish Dallas’ corrupt and dangerous bus bureaucracy,” Huffines said after the legislation passed. “I’m confident that Dallas voters are fed up with the corrupt, self-serving politicians who have ripped-off taxpayers and threatened our students."
Dallas County Schools Interim Superintendent Leatha Mullins said last spring that dissolving the district would create chaos for students’ families and the school districts that rely on the district’s bus service.
Serving 12 school districts in Dallas County, the DCS employs more 2,000 people and has more than 1,900 buses. DCS transports more than 75,000 children to and from school each day.
Closing the district "would cost school districts in Dallas County over $262 million to provide their own transportation and that the legislation will make efficient, effective transportation unfeasible," Mullins said in a prepared statement.
Mullins said one of DCS' smaller clients, the Cedar Hill Independent School District, recently requested bids from for-profit bus providers and learned that it would cost them an additional $900,000 per year for equivalent service.
“To put that in perspective, that would be like forcing that ISD to sacrifice about 18 classroom teachers and never be able to have a way to bring in enough money to replace them," Mullins said.
On July 21, DCS closed on a tax and revenue anticipation note to satisfy the delinquent June 1 principal payments on its general obligation debt. Previously, the district used available cash to make the smaller monthly promissory note payments that were in default.
Dallas County Schools became the subject of inquiry after investing in so-called stop-arm cameras designed to photograph the licenses of cars that failed to heed the warning when a school bus displayed its automated stop sign.
The district partnered with a company called Force Multiplier. DCS agreed to buy Force Multiplier’s cameras and give them to other school districts. In return, DCS was to receive a share of the fines collected from tickets given to drivers who ignore school bus stop signs. However, the program failed to collect as much as expected, leaving DCS $20 million in arrears.
If DCS survives after the vote on dissolution this fall and remains in operation, its finances will remain challenged, according to Moody’s.
“It has no flexibility to raise property taxes, and its school bus stop-arm-camera enterprise will have difficulty generating revenues sufficient to cover annual debt service on promissory notes and other obligations,” analysts explained. “The shortfall will require additional transfers from the DCS general fund and heightens the potential the district may file for bankruptcy.”
If, however, the district is dissolved, the current DCS tax levy will remain in place and should be more than sufficient to pay annual general obligation debt service, they said.
DCS would still likely default on promissory notes because it would not be generating revenue from operations, including its stop-arm-camera initiative.
On Friday, the Dallas County Schools board proposed a tax increase to help with its finances while also placing its dissolution referendum on the November ballot.
Trustees want to increase the agency’s tax rate to a full penny per $100 of assessed property value. That is an increase from the current 0.927-cent rate, a move that trustees believe few homeowners would notice. The agency must have a public hearing on the rate before it is finally approved.
DCS Board President Gloria Levario told trustees the slight increase in the rate would not be noticeable by most taxpayers but could go a long way toward maintaining operations at the bus agency and keeping costs down for area school districts that rely on it for transportation.