North Carolina law grants power to dissolve troubled municipalities

BY SourceMedia | MUNICIPAL | 09/15/21 01:06 PM EDT By Chip Barnett

A new North Carolina law allows a state commission to disband severely stressed cities or towns that have become a financial threat to local taxpayers.

The ?tool kit? legislation expands and strengthens the actions that can be taken by the state Local Government Commission.

The law sets up a legal process for the voluntary or involuntary dissolution of a distressed governmental unit that is no longer viable. Assignment of a locality's debt and assets would be done on a case-by-case basis.

SB 314 was passed by the General Assembly and signed into law last month by Gov. Roy Cooper. It also gives the LGC the authority to mandate specialized training for officials in a unit of local government ?exhibiting fiscal distress.?

The legislation will be very helpful in dealing with municipalities facing severe financial stress, Treasurer Dale Folwell, CPA, told the Bond Buyer last week.

?As a former motorcycle mechanic, when we use the word ?tool kit? that?s exactly what it means,? he said. ?There are tools in there like I have at my home that I hope I never have to use. This tool kit was developed in an effort to make sure that when we do need a tool that we statutorily have the tool to do the job.?

He said the tool kit is something he hopes will not be needed, but is glad it is there as a backstop.

?We were the only state for decades to have anything like a Local Government Commission,? Folwell said. ?So this was a joint effort between all the stakeholders to figure out what?s right, get it right and keep it right on behalf of the taxpayers of these communities.?

The state created the LGC to fix financial problems that local governments experienced during the Great Depression. In 1933, 62 North Carolina counties, 152 cities and towns and 200 special districts were in default on their outstanding obligations.

Since then, local governments or agencies usually need to get the LGC?s permission before they can sell bonds or borrow money. In reviewing each proposal, the LGC looks at whether the size of a bond deal is reasonable and whether the municipality can afford to repay it.

North Carolina is one of only 13 state governments to hold the highest bond ratings. Moody?s Investors Service, S&P Global Ratings and Fitch Ratings all assign triple-A ratings to the state?s general obligation bonds.

Last month, the state sold $253 million of grant anticipation revenue vehicle bonds. The deal was the eighth in a series of such Garvee sales over the past 14 years. Proceeds from the sale are being used to fast-track construction on a variety of state Department of Transportation projects.

The bonds were priced by BofA Securities to yield from 0.05% with a 5% coupon in 2022 to 2.10% with a 2% coupon in 2036.

?Given the duration of that bond it was the lowest interest rate in the history of North Carolina,? Folwell said last week, adding that this highlighted the cooperation between all the state departments involved. ?We have been working with the DOT so that they have a sustainable debt program and I think that was very much reflected in the demand for those Garvee bonds as well as the interest rate and the credit rating that they received.?

The state?s Garvee program is rated A2 by Moody?s, AA by S&P and A-plus by Fitch. The total amount of North Carolina Garvees now outstanding is around $1.1 billion.

On Tuesday, several city, towns and other entities made financing requests totaling nearly $600 million at a meeting of the LGC.

The city of Charlotte wants LGC approval to issue $125 million in limited obligation bonds for a variety of public safety projects. Charlotte wants to build three new police stations and one new fire station, buy a police helicopter and acquire land for future fire stations. The money also would be used to renovate the animal care and control facility, fund other capital building improvements and pay for a new fleet repair station. No tax hike will be needed.

The town of Garner is seeking approval for $69 million of GOs, whose proceeds will be used for parks and greenways, streets, bike lanes and sidewalks, and construction and expansion of new and existing fire, police and emergency services facilities. Additionally, funds would be used for stormwater improvements. A property tax rate hike of up to 2 cents per $100 in valuation might be required to fund the debt service.

The town of Morrisville, whose population has risen almost 69% in the past 10 years, is asking the LGC to approve $37 million of GOs, which might require a property tax increase of up to 3 cents per $100 in valuation to fund debt service on the new bonds. Proceeds would go towards improving parks and recreation facilities and building new ones and transportation projects, Funds would also be used to build a new fire station and fund public safety improvements.

Recently, the LGC removed 38 local governments from its Unit Assistance List, which flags and tracks struggling entities, the largest single clearance in recent history of entities that have resolved their fiscal challenges.

Folwell cited Ahoskie as being one example of a financial turnabout. In 2017, it had over $21.2 million in debt and was struggling financially. Town officials decided to cut debt and expenses to lower its debt to $17.8 million. The plan was so successful the UNC at Chapel Hill's Environmental Finance Center made a video about it.

Still, there almost 160 local governments and public authorities facing governance and financial challenges that remain on the list. The new law boosts the ability of the LGC to help them with additional assistance and provides enforcement mechanisms.

The treasurer's State and Local Government Finance Division staffs the LGC. It oversees the finances of local governments and public authorities in the state and manages the sale and delivery of most state and local debt.

More than 1,100 municipalities, counties, boards of education, public hospitals, utility districts, mental health agencies, housing authorities, universities, airport authorities and other public authorities are subject to this oversight.

Chapter 9 bankruptcy is a bad-case scenario for a government in financial trouble. In North Carolina, the Local Government Commission must approve such a filing, according to published research.

Detroit filed for bankruptcy in 2013 and it is the biggest Chapter 9 filing in U.S. history, estimated at between $18 billion and $20 billion.

In Pennsylvania, Act 47 (the Financially Distressed Municipalities Act of 1987) lets the state Department of Community and Economic Development declare these units as ?financially distressed? and provides for actions such as debt restructuring or consolidation or merger of these municipalities.

In 2011, the Harrisburg, Pennsylvania, City Council filed for Chapter 9 protection, but a federal bankruptcy judge rejected the petition, citing a state law prohibiting the city from filing for bankruptcy.

Central Falls, Rhode Island, Jefferson County, Alabama, and several California cities ? Stockton, Mammoth Lakes and San Bernardino, all filed for Chapter 9 bankruptcy in the past decade. Vallejo, California, filed for bankruptcy in 2008 and it took over three years to emerge from Chapter 9. Orange County, California, filed for Chapter 9 in 1994.

Puerto Rico filed its own version of municipal bankruptcy, called Title III, in 2017. That saga is still ongoing.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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