PA Act 47 and Chapter 9 of the

“PA Act 47 and Chapter 9 of the Bankruptcy Code—A Comparison of Tools to Respond to Municipal Credit Distress” Title Goes Here n (Webinar Presentation) Subtitle Goes Here Samuel T. Cooper, III, Dilworth Paxson LLP (Harrisburg, PA Office), Moderator Panelists—See within. Presenter’s Name Here Thursday, June 30, 2011 Date Goes Here

Panelists Dan Connelly, Associate Director of Fairmount Capital Advisors, Inc. , an Act 47 Recovery Coordinator Marc Feller, Chair of Dilworth Paxson’s Public Finance Group Mark Vacha, Partner in Dilworth Paxson’s Public Finance Group Anne Marie Aaronson, Partner in Dilworth Paxson’s Bankruptcy Group Catherine Pappas, Associate in Dilworth Paxson’s Bankruptcy Group 2

Disclaimer n n Information Only Not legal advice Not to create a client-attorney relationship Information is subject to change without prior notice. 3

Procedural Comments for Webinar n n n No Charge Electronic Submission of Questions Slides Available Upon Request (E-mail mvacha@dilworthlaw. com) 4

Purpose of Presentation—Overview n n n Overview of Formal Legal Frameworks to Respond to Municipal (i. e. local government more generally) Fiscal Distress Address Basics of both Act 47 (PA state-law mechanism) and Chapter 9 (Federal Bankruptcy Code) Examine Act 47 to show its relationship to Chapter 9 in certain respects: n n It is designed as a means to avoid Chapter 9 It is a means to discern whether Chapter 9 is ultimately necessary Focus on limitations of Act 47; what it can’t do and what Chapter 9 may be able to accomplish Advantages of Act 47 over Federal Bankruptcy remedy 5

Purpose of Presentation (continued) n n n Overview of Act 47 Focus on various procedural and other provisions related to Act 47 designation Discussion of provisions related to recovery plans, including certain benefits and obligations for municipalities Some discussion of its utilization Focus on its relationship to federal bankruptcy law for municipalities 6

Purpose of Presentation (continued) n n Chapter 9 Provisions Overview of municipal bankruptcy provisions Focus on a number of common issues regardless of the precise characteristics of the debtor Some particular focus on bondholders 7

Purpose of Presentation (continued) n n n Identify procedural and other legal considerations relevant to these matters Informative for governmental entities, their management and advisors, as well as creditors and other stakeholders Intended to be at a fundamental and intermediate level 8

Organization of Presentation n Compare Act 47 and Chapter 9 with respect to about a dozen Topics of Focus: 1) Utilization 2) Requirements for eligibility 3) Who can file a petition 4) Roles of certain third parties 5) Plans-contents, requirements for approval 9

Organization of Presentation (continued) 6) Plan implementation 7) What can happen (legally) when plans fail 8) What Act 47 provides that Chapter 9 does not 9) What Chapter 9 can provide that Act 47 cannot 10) Impact on collective bargaining 11) Treatment of bondholders 12) Certain related areas of law implicated 13) Summary and Final Thoughts n Appendix of Certain Miscellaneous Topics 10

Summary—Putting Act 47 in larger context: n n Adopted in 1987, amended in 1992 and 1996 (Chapter 9 of Bankruptcy Code was established in the 1930 s in the Great Depression era) In 1991, suspended in part, as to cities of the first class Act indicates, among other things, public policy: To foster fiscal integrity Provide for proper financial accounting procedures, budgeting and tax practices 11

Summary—Putting Act 47 in larger context (continued): n General Assembly expressed legislative intent: Enact procedures and provide powers and guidelines to ensure fiscal integrity Leave principal responsibility for conducting governmental affairs (including priority and manner of expenditures) to the municipality’s elected officials Enact procedures for adjustment of municipal debt by negotiated agreement with creditors Allow municipalities that may no longer be viable to voluntarily consolidate or merge with other municipalities 12

Municipal Bankruptcy: Differences from Other Chapters of the Bankruptcy Code n n A municipal case can be commenced only by the municipality itself There are no involuntary Chapter 9 cases. Municipalities may only file under Chapter 9 pertains to debt adjustment-thus there is not a liquidation concept applicable for municipalities (note: as a practical matter municipalities may on their own undertake a limited form of liquidation through asset sales, privatizations, monetization of assets—more issues of State law) 13

Municipal Bankruptcy: Differences from Other Chapters of the Bankruptcy Code (continued) n n n Unlike a Chapter 11 reorganization—creditors may not propose a reorganization plan Unlike a Chapter 11 case, a general bankruptcy trustee is not appointed (thus, for e. g. , the municipality rather than a bankruptcy trustee exercises powers to assume or reject executory contracts) Also, an important difference between Chapter 9 and Act 47—under Act 47 (and for other State fiscal distress responses) there is NOT a power to reject contracts 14

Municipal Bankruptcy: Differences from Other Chapters of the Bankruptcy Code (continued) n n n Unlike a Chapter 11 reorganization—the inability to reorganize cannot result in liquidation under Chapter 7 (thus, there is not a concept of converting a case) Compared to Chapter 11 reorganization—less court oversight of basic day-to-day spending and operations If Chapter 9 restructuring doesn’t work, the only alternative would be to attempt a restructuring in accordance with State law (i. e. , Act 47 in PA) 15

Recent Development (to be monitored) n n n Recent proposed legislation introduced in Pennsylvania legislature to amend Act 47 Senate Bill 1151, Prime Sponsor—Senator Piccola (R-15 th District)—Parts of Dauphin and York Counties and includes City of Harrisburg As of June 29 th, passed the Senate and referred to House 16

Recent Development (to be monitored) (continued) n n n Senate Bill 1151 prohibits distressed third class cities from filing Federal bankruptcy petitions Provides for establishment of a management board for distressed third class cities Would be established if distressed city fails to adopt or implement a coordinator’s plan (also triggered by approving an alternative plan) Board would have two members appointed by Governor and one by the board of commissioners of related county Provides for Department of Community and Economic Development to conduct a review of all coordinators appointed or serving during 2010 Purpose and legislative intent: “…instituting more direct Commonwealth oversight” 17

Comparing and Contrasting Act 47 and Chapter 9 - 1 st Area of Focus n To what extent has Act 47 and Chapter 9 been utilized? 18

Summary—Putting Act 47 in larger context (continued)—Utilization of Act 47: n What is a “municipality” under Act 47? Broader and narrower than certain other ways the term is used– includes: City Home rule municipality Township Incorporated town Borough and County Notably not included are: School districts Public authorities are also not included 19

Summary—Putting Act 47 in larger context (continued)—Utilization of Act 47: n n n What types of “municipalities” have had distress determinations (source: www. newpa. com)? Cities (@ 12 thus far) Boroughs (@12 (including some where determination was rescinded)) @ 2 Townships No distress determinations have been made for counties 20

Summary—Putting Act 47 in larger context (continued)—Utilization of Act 47: n n n In general terms, most municipalities which have had distress determinations have remained under Act 47 About 26 determinations have been made About 6 determinations have been rescinded Early determinations were made in fall of 1987/1988— majority of these municipalities have remained under Act 47 designation (Source: www. newpa. com ) 21

Summary—Putting Act 47 in larger context (continued)—Utilization of Act 47: n n n n What is the geographical distribution of current or formerly distressed municipalities (by region/county)? About 16 in western half and 10 in eastern half Distressed municipalities located in about 11 counties About: 9 within Allegheny County 3 within Luzerne County 2 within Beaver, Cambria, Delaware, Mercer Counties 1 within Berks, Dauphin, Lackawanna, Lawrence, Pike and Schuylkill Counties Philadelphia/PICA—separate legislation 22

Summary—Putting Act 47 in larger context (continued)—Utilization of Act 47: n Examples of some larger (by population) municipalities which have distress determinations: Pittsburgh (noteworthy that has been ranked as most livable American city (at least once) during this time period) Scranton Reading Harrisburg (noteworthy as State Capitol) Johnstown Chester 23

Summary—Putting Act 47 in larger context (continued)—Utilization of Act 47: n Municipalities which have had distress determinations rescinded (source: www. newpa. com): Borough of Shenandoah Borough of Ambridge Borough of Wilkinsburg Borough of East Braddock Borough of Homestead 24

Summary—Putting Act 47 in larger context (continued)—Utilization of Chapter 9 By Comparison: n n Unlike Act 47, Chapter 9 has been utilized to a very limited extent within Pennsylvania—aware of one filing Westfall Township in Pike County (northeastern PA) filed in spring of 2009 after a developer won a $20 million lawsuit in federal court 25

Utilization of Chapter 9 n n Relatively few Chapter 9 filings compared to other chapters of the Federal Bankruptcy Code (will discuss more near end of the presentation) See American Bankruptcy Institute for certain statistics about filings n From 1980 through 2008 ranged from 1 filing in 1980 to 18 filings in 1991 12 or more filings in 1990 through 1994 Fewer filings by relatively larger general purpose entities —note despite serious and well publicized fiscal issues, cities such as New York in the mid 1970 s, Philadelphia in the early 1990 s, and Cleveland in the late 1970 s did not file 26

Utilization of Chapter 9 (continued): n n See Wikipedia for a listing of certain notable Chapter 9 bankruptcies Certain types of reasons cited in the article with examples: Derivatives/investment losses (Orange County, CA) Pension issues (Prichard, AL, Vallejo, CA) Adverse impact on single revenue source (Moffett, Oklahoma) Adverse impact due to litigation (Desert Hot Springs, CA) Project risk/litigation (Washington Public Power Supply System (Northwest)) Dirt bond/real estate development risk (Sarpy County (NE) Sanitation District) Management issues (Off-Track Betting Corporation (NY)) Health of underlying economy does not always correlate with the fiscal health of a jurisdiction—Orange County, California—circumstance where in large part, the bankruptcy was triggered by isolated transactions—largely driven by pressure on liabilities side (may be reflective of political failures; failures of managerial controls) (Although not a Chapter 9 case, the issues in Nassau County New York in late 1990 s are similar in terms of a relatively affluent area and process issues, notably real estate tax assessment certiorari liabilities) 27

Comparing and Contrasting Act 47 and Chapter 9 - 2 nd Area of Focus n What are the requirements for eligibility? 28

Act 47 (PA Municipalities Financial Recovery Act): Criteria to Determine Municipal Financial Distress n n At least one criterion must be present (see following slides) and The Department of Community and Economic Development determines it is “a valid indication” of municipal financial distress 29

Act 47 (PA Municipalities Financial Recovery Act): Criteria to Determine Municipal Financial Distress (continued) n n n Deficit over a 3 -year period with a deficit of 1% or more in each of the previous fiscal years Expenditures have exceeded revenues for a period of three years or more Default in payment of principal or interest on any bonds or notes or in payment of rentals due any authority 30

Act 47 (PA Municipalities Financial Recovery Act): Criteria to Determine Municipal Financial Distress (continued) n n n Missed a payroll for 30 days Failure to make required payments to judgment creditors for 30 days beyond date of recording of the judgment Failure for a period of at least 30 days to forward taxes withheld on income of employees or to transfer contributions for Social Security 31

Act 47 (PA Municipalities Financial Recovery Act): Criteria to Determine Municipal Financial Distress (continued) n n n Accumulated and operated for each of two successive years a deficit of 5%+ of its revenues Certain failures to make budgeted payment of minimum municipal obligations with respect to pensions Certain failures to reach agreement with creditors Bankruptcy filing under Chapter 9 Decrease in a quantified level of municipal service from preceding fiscal year resulting from a municipality reaching its legal limit in levying real estate taxes for general purposes 32

Municipal Bankruptcy Law: Requirements to be eligible to file n Section 109(c) of Bankruptcy Code sets forth certain requirements for a municipality to file: Authorized under state law to file Must be insolvent “Desires to effect a plan to adjust such debts” Satisfies 1 of 4 criteria related to creditors 33

Municipal Bankruptcy Law: Requirements to be eligible to file n 1 of following 4 criteria/circumstances related to creditors must be the case: Has obtained agreement of creditors holding a majority in amount of the claims of each class that it intends to impair under a plan Has negotiated in good faith with such creditors and has failed to obtain agreement Such negotiation is impracticable Reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 34

Act 47 (PA Municipalities Financial Recovery Act): Provisions Related to Federal Bankruptcy n Act 47 provides authorization for a municipality to file for bankruptcy under certain conditions: (1) After recommendation by the Act 47 Recovery Plan Coordinator (“Coordinator”) (2) Imminent jeopardy of an action by a creditor, claimant or supplier which is likely to substantially interrupt or restrict “the continued ability” of the municipality to provide health or safety services to its citizens (3) One or more creditors have rejected the proposed plan or adopted plan and efforts to negotiate resolution of their claims have been unsuccessful for a ten-day period (4) A condition “substantially affecting” the distress is “potentially solvable” by utilizing a remedy exclusively available through bankruptcy law (5) Failure to adopt a plan or carry out the recommendations of the Coordinator n Majority vote of municipality’s governing body is required 35

Municipal Bankruptcy Law: Requirements to be eligible to file (continued) n n n What does “insolvency” mean? There is a specific provision for municipalities See Section 101(32)(C) “The term ‘insolvent’ means—…with reference to a municipality, financial condition such that the municipality is— (i) generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or (ii) unable to pay its debts as they become due. ” Test that assumes that the municipality is a going concern; focused on ability to operate; not focused on balance sheet In applying requirement to a municipality, would measure whether the municipality can pay for the services it provides 36

Comparing and Contrasting Act 47 and Chapter 9 - 3 rd Area of Focus n Who can put the entity into the applicable framework? (i. e. Who can file? ) 37

Act 47 and Chapter 9 -A Comparative View—Who Can Put the Municipal Entity under the Applicable Framework? n n n Chapter 9 has no involuntary filing mechanism. Thus, creditors cannot put a municipality into Chapter 9. In contrast, Act 47 has provisions for various types of persons (see following slides) that can petition to have a municipality determined to be distressed. This seems consistent with the goal of Act 47 to provide (relatively) early intervention to avoid a municipal bankruptcy situation 38

Act 47 (PA Municipalities Financial Recovery Act): Procedures for Obtaining Determination of Municipal Distress—Who has standing to request a determination of distress n There are 10 different persons or groups: (1) Department of Community and Economic Development (“DCED”), itself (2) Governing body of the municipality (3) A creditor owed $10 k or more under certain circumstances (4) 10% of number of electors by petition (5) 10% of beneficiaries of a pension fund 39

Act 47 (PA Municipalities Financial Recovery Act): Procedures for Obtaining Determination of Municipal Distress—Who has standing to request a determination of distress (continued) (6) 10% of employees who have not been paid for over 30 days (7) Trustees or paying agents of a municipal bond indenture (8) Elected auditors, appointed independent auditors or elected controllers (9) A trustee or actuary of a municipal pension fund if a timely minimum obligation payment has not been made (10) Mayor or manager, as applicable, of a city 40

Act 47 (PA Municipalities Financial Recovery Act): Procedures for Obtaining Determination of Municipal Distress n n There are detailed provisions for requests made by petition and otherwise Within ten days of receiving a request, the Secretary of DCED shall set a time and place for a public hearing at least 2 weeks but not more than 30 days later Such hearing is to be held within the county of the subject municipality (doesn’t need to be within the municipality itself) Between the request and the public hearing, the Secretary may investigate the financial affairs of the municipality 41

Act 47 (PA Municipalities Financial Recovery Act): Procedures for Obtaining Determination of Municipal Distress (continued) n n n Secretary or a DCED official conducts the hearing to hear testimony of requesting party “and other interested persons” Secretary issues an administrative determination whether the municipality is financially distressed within 30 days of the hearing A determination is appealable (re: administrative law and procedure) 42

Comparing and Contrasting Act 47 and Chapter 9 - 4 th Area of Focus n Role of Certain Third Parties— Coordinator, Bankruptcy Court 43

Act 47 (PA Municipalities Financial Recovery Act): Role of Municipal Distress Coordinator n n Appointment: Within 30 days of determination, the Secretary of DCED appoints a coordinator to prepare a plan Qualification: No elected or appointed official or employee of the municipality is eligible; may be an employee of the department or a consulting firm Compensation: DCED is responsible for “reasonable salary and expenses. ” Appointment is not subject to contractual competitive bidding procedures. 44

Act 47 (PA Municipalities Financial Recovery Act): Role of Municipal Distress Coordinator (continued) n n n Access to information: Coordinator is to have access to all municipal records; provides subpoena and mandamus powers to enforce Public Meetings: Coordinator may hold public meetings in connection with plan preparation. Trumping or exception to Sunshine Act (private meetings): Notwithstanding the Sunshine Act, the coordinator may conduct private negotiation sessions between the municipality and individual creditors 45

Act 47 (PA Municipalities Financial Recovery Act): Role of Municipal Distress Coordinator (continued)—Elected Office Restriction n Coordinator may not run for office Of the municipality or its coterminous political subdivisions Within 2 years after the final adoption of a plan pursuant to Act 47 46

Limitations on Role of Bankruptcy Court Chapter 9 limits the jurisdiction of the bankruptcy court n Key role is to approve or disapprove municipality’s proposed plan n Other roles include addressing petitions for relief from automatic stay; hearings about eligibility; plan administration; disputes over classification of claims into creditor classes n 47

Summary—Putting municipal bankruptcy in larger context: Chapter 9 and relationship to state law n n n Chapter 9 reserves certain powers to the States Section 903 provides that chapter 9 does not limit or impair the power of a State to control a municipality in the “exercise of the political or governmental powers of such municipality, including expenditures for such exercise” However, state laws prescribing methods of composition of indebtedness of such municipality may not bind any creditor that does not consent to such composition 48

Summary—Putting municipal bankruptcy in larger context: Chapter 9 and relationship to state law (continued) n n Section 904 provides that unless the municipality consents or its Chapter 9 plan so provides, the bankruptcy court may not interfere with: Any of the “political or governmental powers” of the debtor; Any of the property or revenues of the debtor; or The debtor’s use or enjoyment of any income producing property Legislative notes state that “This section makes clear that the court may not interfere with the choices a municipality makes as to what services and benefits it will provide to its inhabitants. ” 49

Comparing and Contrasting Act 47 and Chapter 9 - 5 th Area of Focus What are the contents or requirements of Plans formulated in Act 47 and Chapter 9? And requirements for plan approval? n 50

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans: Contents of Plans n Act 47 Recovery Plans are to be consistent with applicable law and include any of 10 sets of factors which are relevant to alleviate the distress status of the municipality: (1) projections of revenues and expenditures (2) various recommendations (more detail below) (3) possible changes in collective bargaining (4) recommended changes in ordinances/rules 51

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Contents of Plans (5) recommendations for special audits or further studies (6) analysis related to using federal bankruptcy remedies (7) analysis whether municipality should consolidate or merge with an adjacent municipality or municipalities (8) analysis regarding functional consolidation of or privatization of municipal services (9) a capital budget which addresses infrastructure deficiencies (10) recommendations for greater use of Commonwealth economic and community development programs 52

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Contents of Plans (Recommendations) n Objectives that plan recommendations will: Satisfy judgments Eliminate deficits and deficit funds Restore to special fund accounts moneys for purposes other than those specifically authorized Balance budget, avoid future deficits Avoid a fiscal emergency condition in the future Enhance ability to negotiate new general obligation bonds and other debt Consider changes in accounting and automation procedures Propose reduction of debt on specific claims by an amortized or lump sum payment 53

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Publication, filing, comment period, public meeting, et al. process points n n n Within 90 days of an executed contract between DCED and the Coordinator, the Coordinator shall formulate a plan Plan is filed when the municipal clerk places a copy of the plan on file for public inspection On the date of filing, notice of the plan shall be published by the Coordinator in one or more newspapers with general circulation 54

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Publication, filing, comment period, public meeting, et al. process points n n n Comment period: Written comments may be filed with the Coordinator No later than 15 days after the date of filing Written comments judged by the Coordinator to have value to the plan may be used to develop a revised plan 55

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Publication, filing, comment period, public meeting, et al. process points n n n Coordinator’s public meeting: Shall be set for a date not later than 20 days after the date of filing of the plan. Shall be conducted in the municipality. Comments on the plan shall be received by the Coordinator at that time. 56

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Process— Review of Plan n n General rule: The Coordinator, in his discretion, shall consider comments made on the plan. Additional negotiations authorized: Act encourages additional negotiations between municipality and creditors rejecting the plan— Coordinator is to preside over Governing body proposals: Governing body may propose to the Coordinator resolution of claims which were reason for rejection of the proposed plan, and Coordinator may revise the plan accordingly Revision on own initiative: Coordinator may revise plan on own initiative 57

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Process— Revisions to Coordinator’s Plan n Neither the Secretary of DCED nor the chief executive officer or the governing body, may revise the Coordinator’s plan If the coordinator revises the plan, the Coordinator shall consult with the Secretary of DCED and either the CEO or the governing body A revised plan shall be completed and delivered within 10 days from the date of the Coordinator’s public meeting on the original plan 58

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Process— Preparation and action on alternate plan n n n The Act allows for an alternate plan to be prepared by the municipality if it rejects or refuses to act on the coordinator’s plan In the case of a governing body operating under an optional plan form of government or a home rule charter, then the CEO shall develop a plan In the case of other municipalities, the governing body shall develop a plan Alternate plans are to be developed within 14 days and shall be subject to public meeting The CEO or governing body is authorized to conduct private sessions with individual creditors before the public meeting in an effort to obtain consent to a proposed adjustment and handling of claims Alternate plan would require enactment of an ordinance to approve 59

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued): Process— Review of Plans by the Secretary of DCED n n If an ordinance is enacted approving a plan, the Secretary shall make a determination whether the plan, when implemented, will overcome the municipality’s financial distress If the Secretary determines that it will not, it will provide the reasons for its determination to the municipality and will inform the municipality as to the applicability of provisions of the Act withholding certain Commonwealth funds 60

Municipal Bankruptcy Law: Plans— Basic Considerations n n n A Disclosure Statement regarding a plan for adjustment of debts of the municipal debtor is prepared for creditors Creditors are organized into different classes Classes of creditors whose claims will be impaired vote Creditors whose claims will not be impaired will not vote Executory contract holders would not vote if the plan proposes assumption of executory contracts 61

Municipal Bankruptcy: Considerations Related to Plans (Standard to confirm— interpretive gloss) n n Requirement that the Chapter 9 plan be “in the best interests of creditors” The Chapter 9 plan must be “feasible” 62

Municipal Bankruptcy Law: Confirmation of Plans— Requirements/Factors to Confirm Plan complies with the provision of the bankruptcy code n Amounts to be paid by the municipality for services in the case are disclosed and are reasonable n The municipality is not prohibited by law (including state law) from taking actions necessary to carry out the plan n 63

Municipal Bankruptcy Law: Confirmation of Plans—Requirements/Factors to Confirm (continued) Any regulatory or electoral approval necessary under applicable non-bankruptcy law to carry out the plan has been obtained (or the plan is expressly conditioned on such plan) n Plan is in best interests of creditors and is feasible n 64

Municipal Bankruptcy: Considerations Related to Plans (Standard to confirmcontinued) n n n Requirement that the Chapter 9 plan be “in the best interests of creditors” This is tested by determining whether the Chapter 9 plan is better for creditors compared to what is already the case (See In re Mount Carbon Metropolitan District, 242 B. R. 18 (Bkrtcy. D. Colo. 1999) 65

Municipal Bankruptcy: Considerations Related to Plans (Standard to confirm (interpretive gloss)-continued) n n n Requirement that the Chapter 9 plan be “feasible” Feasibility takes account of likelihood that the municipality can pay debt and provide future public services at the level necessary for it to function as a municipality Level is neither a guarantee of success nor speculative chance of success; rather, a reasonable prospect 66

Municipal Bankruptcy: Considerations Related to Confirming Plans (interpretive gloss continued) (good faith) n n Requirement that the Chapter 9 plan be proposed in “good faith” Certain factors: Must treat all interested parties fairly Efforts to confirm the plan must comport with due process Proposed with honesty and sincerity 67

Municipal Bankruptcy: Specific Issues Related to Confirming Plans n n n Holders of unsecured claims do not need to receive the present value of those claims in order for a plan to be confirmed A plan may be confirmed which does not utilize all the assets of the bankruptcy estate to retire obligations of the debtor A plan does not need to provide for post-petition interest even if the municipality’s asset base is sufficient to provide for such interest (at least where the applicable debt holders claims are unsecured) 68

Comparing and Contrasting Act 47 and Chapter 9 - 6 th Area of Focus n Plan Implementation 69

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued) —Plan Implementation n If the Coordinator’s plan is adopted, the Coordinator shall be charged with implementation and shall: Give notice of plan adoption to creditors, collective bargaining units and other parties Initiate plan implementation and continue it for at least four months Oversee completion directly or turn it over to a person designated by the governing body or by CEO (designee shall provide monthly reports) Terminate plan upon completion Suggest amendments to the plan 70

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued) —Plan Amendments n n May be initiated by Coordinator, Chief Executive Officer of governing body Amendments are to be adopted by ordinance 71

Municipal Bankruptcy: Effects of Confirmation of a Municipality’s Plan n Effects are addressed by Section 944 of the Bankruptcy Code: Binds the municipality and any creditor regardless of whether or not: A proof of such creditor’s claim is filed The creditor has accepted the plan 72

Municipal Bankruptcy: Effects of Confirmation of a Municipality’s Plan (continued) n n n Except as discussed below, the municipality is discharged from all debts as of the time the plan is confirmed The municipal debtor deposits any consideration to be distributed under the debt adjustment plan with a disbursing agent appointed by the bankruptcy court and the court determines such arrangement is valid Debts are not discharged if excepted by the plan or order confirming the plan or owed to an entity that before confirmation neither had notice/actual knowledge of the case 73

Act 47 (PA Municipalities Financial Recovery Act): Provisions Related to Federal Bankruptcy (continued) n n n A municipality that files under Federal bankruptcy law shall be deemed to be a financially distressed municipality under Act 47 A municipality which files under federal bankruptcy law (whether or not an Act 47 proceeding has been initiated) shall utilize the procedures set up by Act 47 concurrently with the federal action, to efficiently expedite the formulation of a plan Implementation of a federal bankruptcy plan shall be “coordinated” through Act 47 and in accordance with requirements set by the Federal court. 74

Comparing and Contrasting Act 47 and Chapter 9 - 7 th Area of Focus n What can happen when there are failures with plans? 75

Act 47 and Chapter 9 -Point of Comparison—Provisions to Address Plan Failures/Lack of Compliance with Plans n n As a general comment—the Commonwealth has more leverage than a Bankruptcy Court when the process forming a plan has stalled Quite possibly, the prospects of heading for Chapter 9 is also a motivating factor for municipalities to carry through on formulating Act 47 plans 76

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued)—Failure to adopt or implement a plan n If a financially distressed municipality has failed to adopt a plan, implement an adopted plan or has adopted an inadequate plan then: The municipality, subject to certain exceptions shall not receive: Grants Loans Entitlement or payment from the Commonwealth or its agencies and Moneys withheld shall be held in escrow 77

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued)—Failure to adopt or implement a plan n Certain exceptions to withholding of Commonwealth funds: (1) capital projects under contract in progress (2) moneys received from an agency of Commonwealth or Federal Government subsequent to the declaration of a disaster resulting from a catastrophe (3) pension fund disbursements made pursuant to State law 78

Act 47 (PA Municipalities Financial Recovery Act): Municipal Recovery Plans (continued)—Failure to adopt or implement a plan n One instance of a municipality which was made subject to sanctions (went under sanctions in 1999, sanctions rescinded in 2002) 79

Municipal Bankruptcy Law: Ending a Chapter 9 Case n Section 930 provides that the bankruptcy court may dismiss a case for cause including: Want of prosecution Unreasonable delay that is prejudicial to creditors Failure to propose a plan within time frame fixed by the court If a plan is not accepted (i. e. by creditors) within any time frame fixed by the court Denial of confirmation and denial of additional time to file another plan or modify the plan Where the court has retained jurisdiction after confirmation: Material default by the municipality with respect to plan Termination of the plan due to an occurrence of a condition specified in the plan 80

Comparing and Contrasting Act 47 and Chapter 9 - 8 th Area of Focus What are some things that Act 47 can provide that Chapter 9 does not offer to a distressed municipality? n 81

Comparing Act 47 and Chapter 9— Certain Aid Provided under State Law, No Similar Federal Assistance under Chapter 9 n n n A major difference is that Act 47 provides access to certain state aid and preferences Provisions for loans and grants (as discussed in following slides) Chapter 9, is a framework to enforce an adjustment of debts, it is not a bailout or mechanism to provide operational support 82

Act 47 (PA Municipalities Financial Recovery Act): Emergency Loan Provisions n After a determination of distress, but prior to the adoption of a recovery plan, interest-free short term loans may be made to assist with immediate cash shortfalls if: n The municipality is in imminent danger of insolvency or There is a “clear and present danger” to the health and safety of the residents Emergency loans are to come due within 9 months from the date of the loan 83

Act 47 (PA Municipalities Financial Recovery Act): Emergency Loan Provisions (continued) n n Application may be made to DCED for a long-term loan under the adopted recovery plan Application will be evaluated upon following criteria: n n Erosion of municipal tax base measured over a 3 -year period A measurement of the change in locally generated municipal revenue over the 3 year period immediately preceding the filing of a financial distress petition (if distress can be traced to a particular event such as a natural disaster or plant closing, measurement is on a before and after basis with respect to the event) “Measurable efforts” of the municipality to raise revenue and cut expenditures prior to filing Detailed financial analysis by the Coordinator that the municipality is “clearly unable” to repay a short-term loan Any loan is to be secured by full faith, credit and taxing power pledge Loan repayment schedule is to be proposed by the Coordinator and should entail a “multi-year phase-in” process 84

Act 47 (PA Municipalities Financial Recovery Act): Grant Provisions n n Grants awarded only after a complete financial analysis of the municipality DCED gives priority for grants which include plans for activities to accomplish: Reduce municipal costs Share municipal services Improve municipal productivity Increase municipal revenues Assist municipality through consolidation or merger (if applicable) 85

Act 47 (PA Municipalities Financial Recovery Act): Certain Priority Benefits to Distressed Municipalities n If a municipality has been determined to be distressed and is not subject to funding suspension then it shall: Receive priority in all economic and community development programs funded by the Commonwealth 86

Comparison of Act 47 and Chapter 9— Certain Powers under Act 47 Not Provided under Chapter 9 n n n One example of how Act 47 can be a more powerful remedy than Chapter 9 relates to taxes Chapter 9 does not enable court (or others) to adjust levels of taxation However, Act 47 allows for certain extraordinary powers to raise taxes 87

Act 47 (PA Municipalities Financial Recovery Act): Provisions Relating to Tax Increases n After a municipality has adopted a plan, it may petition the Court of Common Pleas to increase the rates of taxation beyond maximum rates provided by law for: Earned income Real property or Both n If granted, the increase shall be effective for one year Subsequent increases in rates of taxation may be granted by the court upon annual petition of the municipality Additional amounts resulting from the petition shall not be subject to sharing with a school district n n 88

Comparison and Contrast of Act 47 and Chapter 9—Powers Related to Corporate Changes n n n Unlike other chapters of the Bankruptcy Code, there is no liquidation provision in Chapter 9 (and there is not the ability to convert a Chapter 9 reorganization case into a liquidation case) Act 47 provides for certain municipal corporate reorganizations (discussed in following slide) (Not aware of whether they’ve been used thus far) 89

Act 47 (PA Municipalities Financial Recovery Act): Consolidation or Merger Provisions n n n The Coordinator, as part of a fiscal solvency plan, may recommend that a distressed municipality consolidate or merge with adjacent local governments A consolidation or merger requires approval by a majority vote at referendum Commonwealth policy to give priority to consolidated or merged municipalities in economic and community development programs 90

Comparing and Contrasting Act 47 and Chapter 9 - 9 th Area of Focus Advantages that Chapter 9 provides over Act 47 (or any other state law fiscal distress regime)? n 91

Municipal bankruptcy law: Automatic Stay n A petition under Chapter 9 operates as an automatic stay of enforcement of claims against the municipality (including litigation) 92

Municipal Bankruptcy Law: Ability to reject Executory Contracts (and unexpired leases) n n Municipality rather than a bankruptcy trustee has power to assume or reject executory contracts (and unexpired leases) Municipality if it accepts a contract, accepts both the benefits and the burdens Municipality’s rejection of a contract constitutes a breach To accept a contract, the municipality must cure the default 93

Advantage of Chapter 9—Ability to impair contract rights n n n Bankruptcy Code permits federal courts through confirmation of Chapter 9 plan to impair contract rights of bondholders (and other contract parties) This impairment is not a violation of the contracts clause of federal constitution (In the Matter of Sanitary & Improvement District #7, US. Bankruptcy Court, D. Nebraska (May 3, 1989)) 94

Comparing and Contrasting Act 47 and Chapter 9 - 10 th Area of Focus n Collective Bargaining 95

Act 47 (PA Municipalities Financial Recovery Act): Provisions Related to Collective Bargaining n n A collective bargaining agreement or arbitration settlement executed after the adoption of an Act 47 Recovery Plan: Shall not in any manner violate, expand or diminish its provisions Validity of this provision held up in case law which held that the distinction between financially stable and financially distressed municipalities was based on statutorily defined criteria which had a rational relationship to legislative intent (see Wilkinsburg Police Officers Ass’n by and through Harder v. Com. , 564 A. 2 d 1015) Various arbitrator decisions were found to violate recovery plan (and at least one upheld) between Scranton and firefighters union (See City of Scranton v. Fire Fighters Local Union No. 60, of Intern. Ass’n of Fire Fighters, AFL-CIO, 964 A. 2 d 464, Cmwlth. 2009. ) 96

Municipal Bankruptcy: Impact on Collective Bargaining Arrangements n n U. S. Senate Report No. 95 -989 comments on collective bargaining agreement in context of executory contracts “Incorporated by reference also is the power to accept or reject executory contracts and leases (section 365). ” “Within the definition of executory contracts are collective bargaining agreements between the city and its employees. ” “Courts should readily allow the rejection of such contracts where they are burdensome, the rejection will aid in the municipalities reorganization and in consideration of the equities of each case. ” 97

Municipal Bankruptcy: Impact on Collective Bargaining Arrangements (continued) n n n Equities of the case (noted per Senate Report No. 95 -989): Balancing of budget—an unbalanced budget may preclude judicial confirmation of a municipality’s plan Lack of funds may force cutbacks in police, fire, sanitation and welfare services—imposing hardships on citizens Equities in favor of a city in Chapter 9 will be “far more compelling” than the equities in favor of the employer in a Chapter 11 case (Report quoted “Executory Contracts and Municipal Bankruptcy, 85 Yale L. J, 957 (1976). ) 98

Municipal Bankruptcy: Impact on Collective Bargaining Arrangements (continued)—Renegotiation n n Intent that the power to reject collective bargaining agreements will preempt State termination provisions, but not State collective bargaining agreements Thus, such contracts may be rejected despite contrary State laws but rejection of the contracts may require municipalities to renegotiate such contracts A municipality would not be required to maintain existing employment terms during the renegotiation period (e. g. , Vallejo, CA) Per Senate Report No. 95 -989 99

Comparing and Contrasting Act 47 and Chapter 9 - 11 th Area of Focus n Treatment of bondholders/bond financings/market access 100

Comparing Act 47 and Chapter 9 Treatment of Bondholders n n Important difference Act 47 (like other state laws) cannot impair legal obligations owed to bondholders) Chapter 9, subject to certain important exceptions, can Instances of Act 47 municipalities which have successfully completed debt offerings while in Act 47 —Going into Act 47 is sometimes viewed as a positive development by rating agencies 101

Municipal Bankruptcy law—Municipal Bonds and Preferences n n n Section 926(b) is an important provision for holders of a municipality’s bonds or notes Text: “A transfer of property of the debtor to or for the benefit of any holder of a bond or note, on account of such bond or note, may not be avoided under section 547 of this title. ” Provides protection from bond payments being avoided as a preference (i. e. prevents recapture from the bondholder) Does not distinguish bonds between tax-support, revenue bond, essential versus non-essential or otherwise Applies to payments on bonds and indenture deposits For example, were City XYZ to make a payment on March 1 st and to file for bankruptcy on May 15 th (i. e. a payment within 90 days before the date of the filing), such payment would not be clawed back from the bondholder (or indenture trustee) 102

Municipal Bankruptcy Law: Does the type of bond make a difference? n n n Section 928 is relevant for revenue bonds Trumps a general rule in bankruptcy that property acquired post-petition is not subject to pre-petition security interests “…special revenues acquired by the debtor after the commencement of the case shall remain subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case. ” 103

Municipal Bankruptcy Law: Does the type of bond make a difference? (continued) n “Special revenues” are defined to include five categories (details to follow): 1 st: certain project receipts 2 nd: certain special excise taxes 3 rd: certain incremental tax receipts 4 th: other revenues or receipts from particular functions 5 th: taxes specifically levied for certain projects or systems 104

Municipal Bankruptcy Law: Does the type of bond make a difference? (continued) n n 1 st category of “special revenues”—certain project receipts “receipts derived from the ownership, operation or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide transportation, utility, or other services, including the proceeds of borrowings to finance the projects or systems” 105

Municipal Bankruptcy Law: Does the type of bond make a difference? (continued) n n n 2 nd category of “special revenues”—certain special excise taxes “special excise taxes imposed on particular activities or transactions” e. g. -depending on circumstances may include liquid fuels taxes, alcohol, tobacco, snack taxes (imposed on wholesalers) (distinguish from a sales tax) 106

Municipal Bankruptcy Law: Does the type of bond make a difference? (continued) 3 rd category of “special revenues”—certain incremental tax receipts n “incremental tax receipts from the benefited area in the case of tax-increment financing” n 107

Municipal Bankruptcy Law: Does the type of bond make a difference? (continued) 4 th category of “special revenues”—certain other revenues or receipts n “other revenues or receipts derived from particular functions of the debtor, whether or not the debtor has other functions” n 108

Municipal Bankruptcy Law: Does the type of bond make a difference? (continued) n n 5 th category of “special revenues”—taxes specifically levied for certain projects or systems “taxes specifically levied to finance one or more projects or systems, excluding receipts from general property, sales, or income taxes (other than tax-increment financing) levied to finance the general purposes of the debtor” 109

Comparing and Contrasting Act 47 and Chapter 9 - 12 th Area of Focus n Certain other areas of law 110

Act 47/Chapter 9—Implication of other Law n n Certain federal securities law-Rule 15 c 2 -12 may be implicated Certain typical bond tax covenants can be implicated in a workout situation 111

Rule 15 c 2 -12 Amendments: New Specified Events—Bankruptcy, insolvency et. al. n n Notices about bankruptcy, insolvency, receivership or a similar event with respect to the issuer or an obligated person “Similar event” has been clarified to a large extent by the SEC in the final release providing the 15 c 2 -12 amendments n “Note: … the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U. S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governmental body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person” n In Pennsylvania, a filing for Act 47 distressed municipality status would likely be appropriate for secondary market disclosure (despite it not being formally within the scope of this event) 112

Rule 15 c 2 -12 Amendments: New Specified Events—Merger, consolidation n Although, this other new specified event was oriented toward obligated persons such as major health systems, Rule 15 c 2 -12 would be implicated in case of a merger or consolidation of municipal entities 113

Municipal Bankruptcy: Change in Use Issues if Bond Financed Property Conveyed n n Municipal bankruptcy or other municipal-distressed situations should be approached with general sensitivity to bond tax rules For example, a sale, or lease of certain municipal assets may be an element of generating money for purposes of a restructuring plan If such assets were bond-financed there may be private use created To protect tax-exemption of bonds, certain remedial action may be required (e. g. redeeming certain non-qualified bonds) 114

Municipal Bankruptcy: Change in Use (continued) n “Deliberate action”, tax term of art, refers to event that triggers private use 115

Municipal Bankruptcy: Reissuance n n n A restructuring of municipal debt may result in a reissuance (i. e. a current refunding) of the debt for federal tax purposes Forbearance arrangements with creditors may also trigger this Forbearance arrangements up to 2 years may be eligible for certain safe harbor from reissuance concerns 116

Comparing and Contrasting Act 47 and Chapter 9 - 13 th Area of Focus n Summary of Certain Points and Concluding Thoughts 117

Act 47: Certain Practical “Q &A” Points n n n n All “Q &A”s are for discussion purposes only and suggest certain initial points for consideration. Further analysis should be undertaken in any case based upon particular facts and circumstances with appropriate counsel and advisors. Question #1: Is there any particular relationship between Act 47 and municipal bankruptcy or likelihood that an Act 47 municipality will file? Analysis: Future trends and events are uncertain but at least historically, there is only one PA entity (a township) that filed under Chapter 9 (and is therefore an Act 47 municipality). Question #2: Does Act 47 alter rights of bondholders with respect to payment? Analysis: Although bondholders might negotiate an adjustment of their claims in the Act 47 context, there is no “cram-down” provision existing (nor, most likely, constitutionally permissible) in Act 47 that would change payment obligations to bondholders. Question #3: How is Act 47 viewed by third parties in the markets? Analysis: There has been some feedback through investment bankers/financial advisors, that the rating agencies have viewed Act 47 favorably. 118

Act 47: Certain Practical “Q &A” Points (to summarize) n n Question #4: How does Act 47 relate to market access? Analysis: At least one municipality (a city) was able to offer bonds subsequent to filing for Act 47 status. Question #5: Are there certain provisions in Act 47 which have had little utilization or impact? Analysis: Based on a cursory search, there does not appear to have been utilization of the municipal merger or consolidation provisions. (See for interest, Report of Shenango Valley Intergovernmental Study Committee which in 2003 studied and offered a model for consolidation for 3 cities and 2 boroughs in Mercer County) 119

Act 47: Certain Practical “Q &A” Points (to summarize) n n n Question #6: Does Act 47 amount to a State-takeover of local government? Analysis: Recognizing this is somewhat subjective, Act 47 is likely somewhat more intermediate level of State intervention (compare it to certain control or oversight boards in Northeastern states, for example). (See a January 2007 Act 47 Recovery Plan for the City of Nanticoke which emphasized that “It must be recognized that the terms of Act 47 leave the responsibility for conducting the affairs of the governmental affairs of the municipality in the hands of the local elected officials. ” 120

Summary– Major Shared Characteristic of Act 47 and Chapter 9 n n No takeover of local affairs (neither by Commonwealth, an appointed receiver, by a Bankruptcy Court or Bankruptcy Trustee) Unlike other fiscal relief situations where greater control by higher levels of government (e. g. Camden, New Jersey, certain New York municipalities that have been subject to financial control boards) 121

Concluding Thoughts: Is there a prototypical circumstance where Act 47 is more suitable? Other circumstance(s) where Chapter 9 is more suitable? n Topic open to fair debate—some thoughts for sake of discussion: Act 47—May be suitable for a municipality that has long-term structural issues— (problems that have accumulated over time and that can be solved over time) Act 47 may be more suitable where two things are the case: there are inefficiencies or other problems in collecting revenues; the day-to-day costs of running local government could be better managed Act 47 may be better where there is the cumulative effect of lots of small problems Chapter 9 may be more appropriate in dealing with a single large issue (for example, a crushing judgment—note: Westfall Township); when no level of prudent management will solve the problems—situation where there are crushing liabilities that cannot be paid off realistically even if the municipality runs a surplus in all other respects Chapter 9 may be appropriate in a circumstance where the “cure” is worse than the “ill”—for example—if a municipality would have to sell off various municipal assets in a bad market, monetize City Hall; and fail to provide basic governmental services and risk public safety, etc. 122

Appendix of Certain Additional Topics n n Termination of Act 47 Reasons for Historically Low Filings of Chapter 9 Filings 123

Act 47 (PA Municipalities Financial Recovery Act): Termination of Municipal Distress Status n n Secretary of DCED may rescind status of municipal financial distress following a public hearing The municipality, itself, may petition the Secretary to determine that conditions are no longer present 124

Act 47 (PA Municipalities Financial Recovery Act): Termination of Municipal Distress Status (continued) n Factors considered: Monthly reports submitted by the Coordinator indicate that termination of status is appropriate Accrued deficits of the municipality have been eliminated Obligations issued to finance all or part of the municipality’s deficit have been retired Municipality has operated, for a period of at least one year, under a positive current operating fund balance or equity, as evidenced by audited financial statements prepared in accordance with GAAP 125

Municipal Bankruptcy: Reasons for Low Number of Filings Historically n n n Recommended reading: “Municipal Bankruptcy in Perspective—A Joint Report from the Bureau of Governmental Research and the Public Affairs Research Council of Louisiana” (April 2006) (the “Louisiana Report”) This report was prepared subsequent to Hurricanes Katrina and Rita The Louisiana Report cited 7 factors for low number of cases 126

Municipal Bankruptcy: Reasons for Low Number of Filings Historically (continued) 1 st: Threshold requirements are high—insolvency, State authorization required 2 nd: Municipality is required to engage in negotiations with creditors or have cause to be excused from such negotiations as a pre-condition to filing 3 rd: To get court approval, municipalities have to engage in certain self-help remedies such as raising taxes—Chapter 9 is not a way to avoid politically unpleasant steps 127

Municipal Bankruptcy: Reasons for Low Number of Filings Historically (continued) 4 th: Municipal assets are not subject to seizure—an example of a risk that other types of debtors are exposed to that municipalities do not face 5 th: Concern about ability to borrow and costs of borrowing 6 th: Some of the relief that is available may not be achievable given State authorization requirement (elaboration on the first point) 7 th: The process is expensive. 128