City and Officials Charged in $31 Million Bond Fraud, the Many Faces of Detroit’s Chapter 9, Muni’s Still at Risk Post Election and Solving the Post Issuance Compliance Puzzle Part 10 – How Does it End?
CURRENT EVENTS
SEC Charges Michigan City, Two Former Officials with Fraud (B Buyer, November 6, 2014)
The City of Allen Park, MI, former mayor Gary Burtka and former city administrator Eric Waidelich, were charged with fraud regarding $31 million in tax exempt bonds issued in 2009 and 2010.
The Bonds were issued to finance a movie theatre project in the Detroit suburb. The SEC found that offering documents contained materially misleading statements regarding the viability of the theatre project as well as the City’s financial condition and ability to make the debt service payments.
The City entered into a public-private partnership (P3) for the studio, believing the deal would provide economic revitalization. However, when bond counsel advised that bond proceeds could not be used to purchase land assets to be donated to the P3, the deal fell apart. The developer walked away.
Additionally, official statements continued to mislead investors, failing to disclose that the City was operating at a deficit as well as fraudulently claiming that the theatre project was bringing in $1.5 million annually in lease revenues.
These statements violated antifraud provisions of section 20(a) of the Securities Exchange Act of 1934. Burtka, who was determined to “have control” over Waidelich and the City, became the first municipal official ever to be charged under section 20(a).
Burtka and Waidelich have both agreed to the SEC charges, without admitting guilt. Burtka received a $10,000 fine and both men have been banned from participating in further offerings. All parties have agreed to cease and desist in further violations and the City will strengthen its disclosure and training.
Munis Still At Risk With New Republican Congress (B Buyer, November 5, 2014)
After a fiery and often divisive mid-term election, Republicans gained control of the Senate as well as increased their seats in the House. With Republicans vowing to end gridlock and pass legislation in 2015, President Obama urged focus on corporate tax reform to help fund infrastructure improvements.
“If people continue to pursue reform in any shape, municipal bonds are still at risk,” said John Godfrey, senior government relations representative at the American Public Power Association.
There will be much activity in Washington DC before the holidays, including the need to extend the current Continuing Resolution to fund the government beyond December 11th, the Internet Tax Freedom Act, as well as deal with a host of expired tax provisions known as “extenders,” some of which pertain to bonds, state and local finance, and Puerto Rico.
Godfrey also said that market participants need to convey to lawmakers the message that munis finance the building blocks that “make commerce possible and our cities livable.”
OUT & ABOUT
Historic Last Week – Detroit Bankruptcy: The Finale – The Views
In a myriad of news articles, we reviewed the details of Detroit’s historic bankruptcy proceedings, its confirmation and the emotions of those impacted.
The Wall Street Journal – On Friday, November 7th, Judge Rhodes approved Detroit’s Exit Pan, which paved the way for the City to shed more than 1/3 of its long term municipal debt, or nearly $7 billion. The hardest hit: those holding Unlimited GOs lost 26%, Limited GOs 66%, and bond insurers over 80%. Pensioners lost 90% of their healthcare coverage and part or all of their COLA.
For the next 12 years, Detroit will have a financial oversight board monitoring its finances as well as others watching pensions.
Two other key spotlights were: 1) the Detroit Institute of the Arts leaving the City’s hands to be placed in trust as well as 2) gauging what negative impact the exit plan would have on watchful bondholders in the $3.7 trillion tax-exempt bond market.
In the Economist – “THERE is an exciting feeling of a new beginning,” says John Pottow, a bankruptcy expert at the University of Michigan. After years of mismanagement, the Chapter 9 ruling will give Detroit a chance to recover.
The big question is whether Detroit will manage to become an attractive city again where people want to live, invest, work—and pay taxes.
The Pioneer News – A more local view of the iconic city, which 60 years ago, was the titan of the auto industry. Now, it is emerging from bankruptcy in an attempt to become great again.
With help from the State of Michigan for pensions and a $325 million loan from Barclays, the city will begin the long and painful process of rebuilding.
Conferences/Events for the rest of 2014:
In November: Transportation/P3s:
The Transportation Finance/P3 Conference (Nov 16th-18th, Arlington, VA)
SOLVING THE COMPLIANCE PUZZLE
I (Debbie Todd) just fell in love with this graphic as it so clearly and brilliantly represents the puzzling complexity we are dealing with, as issuers, in meeting our compliance needs. We also know that both the IRS and SEC are paying much closer attention to it these days – and that it is our obligation as issuers to understand (and have fully complied with) our respective bond covenants. As part of a 10 week series called Solving the Compliance Puzzle, I will focus on providing tips, insights and resources for one new line of our compliance puzzle.
So, are you ready?
Today, we’ll wrap up our series with the 10th line of our puzzle – Requirements.
Quick question: How well did you like green vegetables as a kid? If you were like me, not so much, hmmm?
A memory came to my mind when thinking about requirements was being a youngster. I recall sitting sullenly at the dinner table – defiantly staring at the leafy green enemy on my plate.
Staring at those “poison green things” that I had to eat before I could leave the table. Mom would say “you need to finish them dear – they are good for you”. Dad would just give me that “do as your Mother says” look, nod and go back to reading the paper. I was doomed…
Yep – I am talking about the dreaded “poisonous” brussel sprouts. It was going to be a long dinner night.
So…how are compliance requirements like brussel sprouts? I can explain with two taglines…
The first great tagline sums up what I think most, if not virtually all of us feel…
“I love sorting out which compliance regs to follow, said nobody, ever.”
(by Unified Compliance Framework)
Why would we do it then? Well…simply put – if we don’t…the consequences could be very unhealthy for us. Time. Money. Reputation. Trust. Access to Capital. Achieving our Mission….and Stress.
So…to get started, what does requirement mean? I found three closely related definitions…
- Some quality or performance demanded of a person in accordance with certain fixed regulations (I call this one “broccoli”)
- A thing that is compulsory; a necessary condition (more like “spinach”)
- Constraints, demands, necessities, needs, or parameters that must be met or satisfied, usually within a certain timeframe. (definitely “brussel sprouts”)
As a kid, eating vegetables may not have been your favorite thing to do. However, the nutrients in them helped you grow up strong and healthy, with the energy to accomplish great things… Thanks Mom!
The same holds true in virtually all aspects of life. Fulfilling certain requirements leads to success.
Let’s look at a few examples:
- When you apply for a job, you need to have a certain amount of education and experience
- If you want to buy a house, you need to have a certain level of income and down payment
- If you want to win a marathon, you need to have a certain level of physical health and training
Do you think twice about getting the proper levels of education, experience, income or physical training to achieve these goals in your life? You probably also realize that each one takes dedication, time and effort.
The same holds true for our compliance. We see requirements everywhere we look in our bond documents – in our official statement, our disclosure agreements, resolutions, tax certificates and in our filings with the IRS and SEC – just to name a few of the big ones.
If you want to meet your compliance obligations, you need to understand the requirements, and then take the steps needed to implement and maintain them. It also takes dedication, time and effort.
The second neat tagline, also from Unified Compliance Framework, says: “Your job is complex and the stakes are high. We’ll make it easier.”
In case you were wondering -UCF focuses heavily on complex IT compliance. In my humble opinion, bond compliance and the changing regulations we deal with rates right up there…do you agree?
As a municipal bond issuer who is dealing with increasingly complex daily operations, lingering budgetary and staffing pressures…you know your job is complex. Recent scrutiny from the IRS and SEC (or just the thought of it) keeps ratcheting the stakes higher. That’s why Issuer 2 Issuer is here…
We’ll make it easier. Seriously. Actually, I hope you think we are already making it easier for you…
And, maybe even a little fun!
Over the last few months, we have been sharing all kinds of tools, resources and tips in the Monday Muni Minutes – designed for you as an issuer. Articles and tips helped you stay abreast of what’s going on in the muni market as well as tools and resources to help you in specific areas of your compliance program.
Take a quick look back up at the 10 lines in the compliance puzzle – we covered one per week.
You can go back to each week’s Muni Minutes and quickly dig a little deeper into each item by clicking on the numerous green hyperlinks. Again, the puzzle series was designed to give you an interesting 30,000 foot overview of these key areas of post issuance compliance.
Another interesting thought just hit me as I took that one final look at my (beloved) Puzzle…
The word Compliance itself is a deep, rich green…not like in broccoli, spinach or brussel sprouts green for today’s story, but more like “you’re in the money” green. A solid, effective compliance program DOES save you money (and headache)! How fitting is that, right?
Either way, whether it’s healthy veggies or being “in the money” – both are really, really good for you.
This concludes our first segment. I hope you found this educational series on “Solving the Compliance Puzzle” helpful. Stay tuned…this was just a glimpse of the innovative resources which are available. There is much more yet to come!
Again, the Monday Muni Minutes is here to provide value to you, as the issuer.
Next, I’d love to dig more into the nuts and bolts of specific sections of effective compliance programs with you. Are you in?
So…the 64 thousand dollar question is….what is the biggest challenge(s) can we solve to help you successfully reach your post issuance compliance goals? In order to make the next steps as effective and valuable as possible, please complete the short survey which will arrive in your inbox tomorrow.
You will also receive a short e-mail from me on Friday, November 14th with more details…until then,
Have a great week!
To your compliance success,
Debbie
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
P.S. This week, look for a quick, but critical survey from me on our next steps. Please fill it out and return it as soon as you can. Then check your inbox for something from me on Friday, November 14th….
P.P.S. Want a one-click way to get faster information? If you are on LinkedIn, you can get instant access to breaking muni news articles as well as interesting compliance tips and resources, posted by us several times a week. Join our private Group Page, and follow us on our Company Page.