There's much to be said about standardized, off-the-shelf solutions when business problems arise. A clear model approach can save time and effort, not to mention the sense of responsibility for charting a course through unknown territory, even if there are particularities to each situation. And at their best, they can represent the distilled wisdom of a profession for dealing with a given issue.
It's no surprise that as more and more municipalities are dealing with the need to restructure their obligations, they are looking for a template for a Chapter 9 filing. And many are hoping that the highly publicized restructuring plan of Vallejo, Calif., will prove to be just that template.
It's not surprising. Between the wage and pension concessions that the city was able to get, and its planned austerity budget, the business plan should see Vallejo in excellent financial shape four years down the road; strong enough, in fact, that it should be able to return to the bond market for refinancing — an outcome that must seem like a dream to the mayors and managers of the many cities and towns facing distress, not to mention their current and prospective bondholders.
There are reasons why municipal executives should not be in a rush to download a copy of Vallejo's filing and do a quick search-and-replace on the names and numbers that point to two crucial lessons about municipal restructuring that all those with a stake in a municipality's financial health should take to heart.
The first is that Vallejo's plan didn't come cheap. According to their documents, the two years in court cost them $9 million — no small amount of money, though if that's what was needed to make it happen, it was surely worth it.
But was it necessary? Here's the first lesson: Anything you can get under Chapter 9 you can get without going to court as long as everyone is interested in arriving at a consensual agreement. Furthermore, the relative paucity of Chapter 9 filings until now means that the law is still largely undecided — another reason to avoid going to court if possible.
So while the possibility of a filing can be an important encouragement to the parties, because it provides leverage, actually resorting to it could amount to loss of control to all parties, and at worst, a costly failure in the negotiations.
But even assuming the Chapter 9 filing was the optimal solution for Vallejo, that does not mean a similar plan would work elsewhere. And thus the second lesson: There is no one-size-fits-all solution for distressed municipalities. Not just because the political cultures vary by location and so condition what kind of workout will be possible, but because the actual mechanics of distress differ. Distress, after all, has multiple drivers. Declines in revenues can be cyclical or systemic. Obligations can be to one or more of labor, pensions, or debt service. Therefore, a successful workout must target the specific constellation of issues in play.
Vallejo was under pressure from high labor costs, due to collective bargaining agreements, as well as skyrocketing pension obligations. Not only was their debt service a smaller part of the equation, since most of their bonds were insured, the bondholders themselves had relatively little incentive to come to the table. The resulting arrangement, in which unions and pensioners made substantial concessions while bondholders saw their principal preserved, addressed both the political and fiscal realities of the town.
But if you take a look at Harrisburg, Pa., you see something entirely different. There, the prime concern is the debt — with $288 million in debt and a population of 70,000, that's an obligation that cannot be serviced and a Vallejo-style workout that focused on wages and pensions would ultimately fail. And because not all bonds are the same, the precise makeup of a restructuring agreement will vary with the makeup of the individual portfolio.
In the long run, we can hope that the financial markets will start providing the kind of creative solutions that exist in the corporate world, such as debtor-in-possession financing, which would allow both the municipality and its debtors some long-term stability while the restructuring is taking place.
Until that time, municipalities and their various stakeholders will have to take great care in making sure that the workouts are made with care, with an understanding that a consensus agreement is in everyone's best interest, and that the primary lesson from other restructurings is that each case calls for its own solution.
