States hold sway over their cities in bankruptcy matters
Bloomberg View’s Josh Barro wrote an interesting piece Thursday urging Scranton, Pennsylvania to declare Chapter 9 bankruptcy. Scranton has achieved national attention after the mayor reduced all city workers’ pay to minimum wage last week because the city could no longer afford paying their full salaries, a powerful image of how little cash Scranton has left.
The problem with Barro’s proposal is that Scranton cannot file for Chapter 9 without the consent of Pennsylvania’s state government. Chapter 9 bankruptcy is a part of the federal bankruptcy code, and it gives individual states the authority to decide whether their cities can go bankrupt:
States play a key role as gatekeepers or guardians in that, by virtue of [bankruptcy code] amendments codified in 1994, they have to specifically authorize their municipalities to file for Chapter 9. Silence on the matter is taken as a prohibition on filing.
If you watched the fiscal crisis unfold in Pennsylvania’s state capital of Harrisburg over the last two years, you saw how many obstacles the state imposed on its cities to prevent them from filing for bankruptcy. Pennsylvania’s Act 47 prescribes how the state can manage its fiscally distressed cities. My Reuters colleague Hilary Russ wrote an excellent story on the weaknesses of Act 47, including the fact that it requires no hard deadlines on cities to devise and implement a recovery plan. Scranton has been in the state’s distressed city program for 20 years.
Act 47 does allow for the appointment of an outside receiver with significant powers to negotiate with creditors and seek court approval to force a city to raise taxes. This is what’s happening in Harrisburg right now and could be considered equivalent to a state-level bankruptcy process.
Bankruptcy can be a very useful process for cities seeking to reduce debts. But cities also need to consider cutting the number of employees they have, stopping automatic pay increases, lowering pension costs and raising taxes and fees to generate more revenue. Chapter 9 bankruptcy does have a stigma that will significantly raise borrowing costs once a city regains access to the markets.
The promise and peril of energy tax revenues
Of the $763 billion in tax revenues that states collected in 2011, only $14.6 billion – less than 2 percent – came from severance taxes on coal, gas and oil. Energy production is very concentrated in the United States: Just nine states receive over 5 percent of their tax revenues from energy producers. Currently, the bulk of severance revenues comes from oil production. Alaska, a state floating on an ocean of oil, gets 76 percent of its revenues from a handful of big oil companies that have drilling rights on the North Slope of the state.
Although there has always been natural gas production in America, hydraulic fracking has given rise to substantial drilling activity in several Northeastern states along the Marcellus and Utica shale formations. Pennsylvania, West Virginia and Ohio have substantial reservoirs of natural gas, but the impact this boom will have on state finances is not yet known. These new supplies have come to market when demand is down and have swamped the nation’s usage and storage capacity, driving gas prices down to record lows. States that rely on, or plan for, revenues from energy severance taxes will face a lot of volatility from demand and price changes. Natalie Cohen, head of municipal research at Wells Fargo, sketched it out in a recent report:
Watching Harrisburg crash and burn
We are now watching Harrisburg crash and burn. The busted Pennsylvania capital of 49,000 is crushed by $463 million in city debt and an additional $282 million in debt for the public school system. The state senator representing the area, Jeff Piccola, used his power last June to pass state legislation (Act 47 amendments) that shackled Harrisburg with accepting a receiver appointed by the governor and barred the city from filing bankruptcy until June 30, 2012.
Adhering to the Act 47 requirement that the mayor work with the city council to approve a fiscal recovery plan, Mayor Thompson fought a months-long war that resulted in her plan being rejected three times and the governor’s appointment of a receiver, David Unkovic. After the Dauphin County court approved Unkovic last November, he tried to help the city balance the budget, sell assets and negotiate with bondholders. Amid all that action, a subset of the city council, against the mayor’s wishes, filed a Chapter 9 municipal bankruptcy petition that was ultimately rejected by a federal judge as a result of Senator Piccola’s Act 47 legislation.
Harrisburg’s biggest albatross is its responsibility for the debt of the Harrisburg incinerator – a monstrosity of design and a debacle of public financing. The responsibility for this debt first lies with the city and then with Dauphin County and bond insurer Assured Guaranty.
Pennsylvania’s proposed fracking law will exacerbate its budget shortfall
As Pennsylvania Governor Tom Corbett prepares to release the state’s fiscal 2013 budget tomorrow, the AP is reporting that Republicans in the state legislature are planning to cram through a law that levies a minimal tax on gas and oil drillers in the state. Although taxes on gas and oil production could be a means of plugging substantial revenue shortfalls, it’s likely that the legislation will require drillers to pay the smallest level of fees of any state with recoverable energy assets.
From the AP today (emphasis mine):
Pennsylvania’s top-ranking state senator says he’s hoping for a speedy vote in his chamber on sweeping legislation to impose a drilling fee and update safety regulations on the booming natural gas industry.
Senate President Pro Tempore Joe Scarnati said he hopes senators will vote on the bill by Monday night. The proposed compromise hasn’t been released publicly or amended into a bill, but Scarnati says he believes it will get enough votes to pass.
The provisions were agreed to by the Legislature’s Republican leaders and fellow Republican Gov. Tom Corbett, without input from Democrats.
Pennsylvania’s fracking competitiveness
In a post earlier this week I said that Pennsylvania would be forgoing approximately $24 billion in fracking royalties and that the adoption of an “impact fee” would shortchange the citizens of the state.
The Pennsylvania governor’s office responded to my post claiming that I had neglected to include other taxes collected related to gas drilling:
First, any fair consideration as to the value that Pennsylvania taxpayers will receive from natural gas development would include ALL taxes paid by operators, and landowners, engaged in the activity. Nowhere in the analysis is consideration given to the hundreds of millions of dollars paid annually already under the state’s existing corporate net income, personal income, capital stock and franchise, liquid fuels and other taxes.
The Pennsylvania governor’s office responds
On my post arguing that the state of Pennsylvania will forgo $24 billion in royalties from gas fracking, the governor’s office has responded:
The premise of the article – that PA will “forgo” billions in royalties because it does not adopt a severance tax – is simply misplaced – and misleading.
First, any fair consideration as to the value that Pennsylvania taxpayers will receive from natural gas development would include ALL taxes paid by operators, and landowners, engaged in the activity. Nowhere in the analysis is consideration given to the hundreds of millions of dollars paid annually already under the state’s existing corporate net income, personal income, capital stock and franchise, liquid fuels and other taxes. While many states [against] which Pennsylvania is actively competing for limited capital investment may impose some level of severance tax, they do not impose the same suite of taxes.
Second, and more importantly, Governor Corbett was elected under the premise that we do not tax ourselves to prosperity. Creating an economic atmosphere which grows jobs and attracts investment will do more to increase revenue than adding new layers of taxes on job creators and Pennsylvania landowners.
Natural gas development is an oasis in an economic desert we all hope to emerge from as soon as possible. This activity is putting tens of thousands of Pennsylvanians back to work. And guess what? They all pay taxes. Its lowering energy prices for Pennsylvania businesses – letting them hire more, produce more and yes, pay more in taxes as they do better.
It makes no sense to squander this opportunity.
Patrick Henderson, Energy Executive Governor Tom Corbett
Pennsylvania to forgo $24 billion in fracking royalties
There are shale gas fields covering more than half of the United States, but Pennsylvania has emerged as the rising star of domestic energy production with its “Mighty Marcellus” fields. This is a great resource for Pennsylvania, but I’ve been confused about legislation that would impose an “impact fee” on shale gas producers instead of the traditional volume-based royalty structure used by other states. The loss of revenues to the state over the next 20 years using the “impact fee” could be approximately $24 billion using current gas prices. If gas prices doubled (they are currently at 10-year lows), losses to the state could exceed $48 billion or more.
The energy states of North Dakota, Wyoming, Texas and Oklahoma historically have earned substantial revenues from energy royalties. It seemed odd that Tom Corbett, the Pennsylvania governor who received substantial campaign contributions from gas producers, barred his shale gas commission from even considering a royalty or gas tax.
Muniland’s most active states
In the municipal bond market, one of the most insightful ways to examine a state is to look at how actively its bonds trade. Broker-dealers make money by trading, so naturally they go where the action is and commit market-making resources to those states. It’s generally true that the most populous states are the ones with the most traded bonds, but if we map the wealth of a state’s citizens to how often that state’s bonds trade, we get some interesting results. For example, New Jersey, which has only 2.8 percent of the national population but a high proportion of its wealthy citizens, might have the highest number of municipal bond owners as a percentage of state population.
The municipal bond market does not trade on an exchange but rather on “alternative trading systems” (ATS). These are systems where dealers post inventories of bonds to be aggregated. The largest of the retail ATS is Bonddesk, which does some excellent data analysis for both the municipal and corporate bond markets.
Where does fracking water go?
Fracking — the extraction of natural gas from underground deposits of shale — is receiving an increasing amount of attention. The 2010 documentary Gasland brought the issue into the national spotlight and highlighted the problem of contaminated groundwater that can occur when a well casing ruptures and fracking fluids escape into the water table. In addition, there is the issue of used fracking liquids being injected into spent wells for permanent disposal. Of course, the fracking industry and environmentalists have a lot of disagreement about the extent to which these fluids contaminate groundwater.
There is another, less discussed, problem of used fracking fluids that are moved offsite for processing and disposal. Where are these fluids going and who is regulating them? The community of Kingston, NY (near where I live) decided they didn’t want to accept these fracking fluids for processing. From the Daily Freeman:
Harrisburg back to square one
Federal bankruptcy judge Mary France dismissed the Harrisburg City Council’s petition to file municipal bankruptcy last Thursday. According to Bloomberg her ruling stated:
“For Chapter 9 bankruptcy to work, all of the branches of the municipality must be on the same page,” France said. “Therefore I find that city council was not authorized to file the petition.”
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Resident Muniland expert
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