SAN FRANCISCO — Lawyers for the city of Vallejo, Calif., said the National Federation of Municipal Analysts failed to back up “apocalyptical” predictions with any evidence in the city’s response to a brief the organization filed in its bankruptcy case.
The NFMA submitted an amicus curiae — or friend of the court — brief to the U.S. Bankruptcy Court for the Eastern District of California supporting a request by the National Public Finance Guarantee Corp. for a state credit-enhancement program. The bond insurer asks that funds from a state-aid intercept program be diverted from the city to owners of its certificates of participation.
Vallejo filed for bankruptcy in May 2008, citing unsustainable labor contracts that rendered it unable to meet its obligations.
The intercept program cited in the NFMA motion — the vehicle-licensing fee enhancement program — secures some bonds issued by municipalities in California. Revenues can be diverted away from a bond issuer like Vallejo under a credit-enhancement program and sent directly to a bond trustee for debt-service payments.
The city’s response also took issue with the NFMA’s claim that denial of its motion, which is set to be argued Monday, would have a “devastating effect” on access to capital for cities, towns, counties, school districts and other municipal issuers in California and across the country.
City attorneys described the claim as “utterly speculative” and said there was no evidence a denial would devastate California’s municipal credit markets since the most recent financing supported by the enhancement program occurred in 2003.
The NFMA claims that 34 similar intercept programs in 24 states, which underlie billions of dollars of debt issued by municipalities, are potentially at risk of significant downgrades if the motion from National Public Finance Guarantee is rejected.
“To suggest that the court’s denial of the motion will result in a flood of defaults on state credit-enhancement programs ignores both California and bankruptcy law,” said the Vallejo response filed Monday.
According to the city, the NFMA neither cited nor discussed relevant California law in its motion, relying instead on irrelevant cases that do not apply to the Chapter 9 bankruptcy law.
City attorneys argued that the state could make obligations like the vehicle licensing program “bankruptcy-proof” by drafting statutes and constitutions as it did in the Orange County bankruptcy case. They said California has deliberately placed vehicle licensing funds in the hands of cities and counties rather than state legislators and creditors.
NPFG asked the judge handling the Vallejo bankruptcy case in August to order the resumption of state intercept payments that back one of Vallejo’s issues. The insurer has argued that the bankruptcy filing did not abrogate the vehicle-licensing fee pledge.
The bankruptcy filing affected $53 million of debt backed by the general fund, including the bond issue in question — $4.8 million of COPs sold in 1999. The deal carried insurance by MBIA Insurance Corp., now operating as National Public Finance Guarantee, as well as a debt-service reserve surety bond from the insurer.
The insurer is asking Judge Michael McManus to issue an order affirming that the bankruptcy stay does not extend to the vehicle-licensing fee payments, or to modify the stay to direct trustee Wells Fargo to ask the controller’s office to implement the vehicle licensing fee intercept under state law.
Vehicle-license fees and successor taxes that the state distributes to Vallejo secured the COPs. In connection with the 1999 COP issue, the city agreed to allow the state controller to intercept vehicle-licensing fee payments to the city and remit them to the bond trustee in the event of non-payment.
The 1999 bonds appear to be singled out for non-payment.
Vallejo began making reduced installment interest deposits on the 1999 COPs in fiscal 2010, according to a disclosure notice Wells Fargo filed in June with the Municipal Securities Rulemaking Board.
The city plans to completely suspend payments for four years, beginning July 1, according to a tentative workout plan not yet submitted to the court.