Chapter 9 of the United States Bankruptcy Code allows a municipality (or government-created entity) to reorganize its debts and restructure its contractual relationships. Exercised appropriately, these powerful tools would allow the Port Authority of Allegheny County to stave off service cuts, restructure its business model and emerge a stronger and more streamlined entity. Faced with a projected deficit of $64 billion, the Port Authority is predicted to eliminate 46 bus routes, cut back the 56 remaining bus, T and incline routes, and lay off approximately 500 of its 2500 workers by the summer months. (See Tom Fontaine, Hundreds protest Port Authority transit cuts, Pittsburgh Tribune Review, March 1, 2012, available at http://triblive.com/x/pittsburghtrib/news/roadwork/s_784129.html). Additionally, the Port Authority would close up to half of its bus divisions and raise fares on routes operating outside of downtown. (Id.). Based on this information and predicted plan of attack, the Port Authority is clearly in a state of financial distress.
Port Authority board members must remember that they sit on the board as fiduciaries to the regional community. They operate the Port Authority in trust for the benefit of transit riders and the public at large. They do not govern for the benefit of any particular elected official(s), organized labor, management, vendors or any other special interest group. The board’s duty to the public at large is paramount and must trump every other interest competing for the Port
Authority’s resources. Reliable public transit is a critical component of fully functioning modern economy and is a necessary public utility. If reducing legacy costs means increasing service and reducing fares, then that is exactly what should be done. The Port Authority exists for the purpose of providing public transportation at affordable rates – not to provide good paying jobs. Job creation and economic justice are policy objectives that are more appropriately played out in the form of minimum wage increases, affordable and perhaps public healthcare and strong social security – which are all discussions for another article! Elected officials should not confuse these policy goals with the charge held by Port Authority board members to operate the Authority in line with its stated mission, which is “to deliver outstanding transportation services which connect people to life.” Chapter 9 provides a viable and superior option for the Port Authority to reorganize its business model and emerge from bankruptcy as a revitalized agency that efficiently serves the residents of Allegheny County in manner that delivers on its stated mission.[related]
What is Chapter 9 Bankruptcy?
Chapter 9 of the Bankruptcy Code functions to provide municipal entities that are financially distressed with protection from its creditors while it develops and negotiates a plan to adjust its debts. In general terms, the bankruptcy court is not as involved in managing a Chapter 9 bankruptcy case as it is in corporate reorganizations under Chapter 11.
Section 109(c) of the Bankruptcy Code spells out the factors that must be present for protection under Chapter 9. First, only a “municipality” may file for Chapter 9 relief. The Bankruptcy Code defines a municipality as a “political subdivision or public agency or instrumentality of a state.” 11 U.S.C. § 101(40). In addition to political subdivisions such as counties, cities, towns, boroughs and townships, a municipality may also include public agencies or instrumentalities that are organized for the purpose of constructing, maintaining, and operating revenue producing enterprises. While some courts have interpreted the definition of municipality under the Bankruptcy Code broadly, others have employed a narrower interpretation of the term.
Not only must a proposed Chapter 9 debtor meet the bankruptcy code definition of a municipality, the proposed debtor also must have specific state authorization to be a debtor under Chapter 9. State authorization to file bankruptcy under Chapter 9 must be “exact, plain, and direct with well-defined limits so that nothing is left to inference or implication.” In re Sullivan County Reg’l Refuse Disposal Dist., 165 B.R. 60, 73 (Bankr. D.N.H. 1994). The law of the Commonwealth of Pennsylvania provides such authorization in the Financially Distressed Municipalities Act, commonly referred to as Act 47 (53 P.S. §§ 11701.101 et seq.).
Once state authorization has been obtained, the third factor is insolvency. In order to qualify as a debtor under Chapter 9, a municipality must be financially insolvent. In other words, the municipality cannot pay its debts as they come due.
Finally, § 109(c) requires that the municipality have made some attempt to resolve its disputes and develop a consensual plan with its creditors before filing. “Some commentators suggest, however, that a Chapter 9 debtor may be permitted to file before it engages in these negotiations when necessary for protection from creditor collection efforts while it attempts to negotiate.” (See Hinkle et al., Chapter 9 Bankruptcies on the Rise as Municipalities Grapple with Recession, available at www.klc.org/UserFiles/Chapter_9_Bankruptcy_Ma-Ap-12.pdf).
If eligible to file for bankruptcy protection under Chapter 9, the benefits to a municipality are numerous. “Chapter 9 allows a municipality to restructure debt and rebuild with minimal effect” on the constituents of such municipality. As in Chapter 11 bankruptcies, Chapter 9 includes an automatic stay provision which prohibits creditors from taking action against the debtor for the collection of debts while the debtor remains in bankruptcy. Further, court intervention is minimal as the court generally will not interfere with the management of local government entities.
“Perhaps one of the most controversial, yet beneficial aspects of Chapter 9 is a municipality’s ability to reject onerous collective bargaining agreements . . . with its unionized workforce.” (See, Kirk Burkley, Chapter 9 and Act 47 – A Light at the End of the Tunnel for Debt Laden Municipalities,).
Is the Port Authority Authorized to File for Chapter 9 Bankruptcy Protection?
The Port Authority is organized as an agency of the Commonwealth of Pennsylvania by statute. 55 P.S. § 553(a) defines the Port Authority as a body “corporate and politic; exercising the public powers of the Commonwealth as an agency thereof.”
While Pennsylvania law provides municipalities with the necessary authorization to file for Chapter 9 bankruptcy, under the current state of Pennsylvania’s law, authorities are not permitted to file for Chapter 9 bankruptcy. Section 11701.103 of Act 47 defines a municipality as “[e]very county, city, borough, incorporated town, township and home rule municipality.”
53 P.S. § 11701.103. In turn, § 11701.261 of Act 47 authorizes a municipality to file a “municipal debt adjustment action pursuant to the Bankruptcy Code” if one of several elucidated criteria is present. 53 P.S. § 11701.261. Thus, while Act 47 provides municipalities with viable options for financial recovery such as filing for bankruptcy protection, an agency such as the Port Authority, as defined by state statute (55 P.S. § 553(a), see supra), is not included within the Act’s definition of a municipality and is thus not entitled to its relief.
Based on Act 47’s definition of municipality, in order to permit the Port Authority to file for Chapter 9 protection, Act 47 must be amended in such a way as to authorize authorities, including the Port Authority, to file for bankruptcy.
In March 2011, Allegheny County councilman Matt Drozd proposed a resolution requesting that the Pennsylvania legislature authorize the Port Authority to become a debtor under Chapter 9 of the Bankruptcy Code. The resolution suggested that it would be in the best interests of both the Port Authority and the residents of Allegheny County to allow the Port Authority to seek Chapter 9 bankruptcy protection provided that all requirements of § 109(c) are met. Councilman Drozd was on the right track, but the legislature took no action and his efforts derailed.
Why the Port Authority Should Seek to File For Chapter 9 Bankruptcy Protection
As explained, the Port Authority is clearly in a state of financial distress. Such distress has been documented time and time again in the local media and the best course of action for the Port Authority has been a topic of hot debate for the past several years.
This article advocates for government intervention akin to the intervention of the Federal Government in the “bailout” cases of General Motors Corporation and Chrysler in the past four years. In the GM and Chrysler bankruptcy cases, the Federal Government stepped in to “regulate by deal,” a term used by many commentators to describe the role of the Federal Government in the reorganization process. The Government used its position to intervene in the arrangements for bankruptcy plans and used its leverage to fund and shape a particular result. The active role of the government in both the cases of GM and Chrysler charted the course of the bankruptcy proceedings, allowing both GM and Chrysler to reorganize their businesses through an organized asset sale. (See Heminway, Federal Interventions in Private Enterprise in the United States: Their Genesis in and Effects on Corporate Finance Instruments and Transactions, 40 Seton Hall L. Rev. 1487 (2010)).
Government intervention in both these bankruptcies allowed the automakers to enter and exit bankruptcy in an expeditious amount of time. Chrysler’s bankruptcy lasted only 41 days and GM’s bankruptcy lasted a mere 39 days. The Chrysler and GM bankruptcies were structured as asset sales under § 363 of the Bankruptcy Code. Section 363 allows corporations to sell their assets outside of the ordinary course of business in a bankruptcy proceeding.
In the case of Chrysler, after filing for bankruptcy protection under Chapter 11 of the Bankruptcy Code, the majority of its assets were sold to a newly formed entity. The new entity received a commitment from the United States government in the form of debtor-in-possession (“DIP”) lending to not only fund the asset purchase but to also fund the continued operations of the entity. As part of the Government’s commitment to Chrysler, Chrysler was required to reach a new collective bargaining agreement with the International Union of United Automobile Aerospace and Agricultural Implement Workers of America (UAW) which restructured the wage structure for current employees and the pension benefits for retirees. Furthermore, the Government withheld a certain amount of funding until the Chapter 11 plan was ultimately confirmed by the Bankruptcy Court. The GM sale and plan process followed a similar course.
Similar to the auto cases, perhaps the most significant problem that faces the Port Authority is the overwhelming legacy costs of healthcare and pension. Currently, the Port Authority has more retired employees than active, working employees – a comparison in numbers of 3300 to 2500, respectively. Each employee – both retired and active – is awarded with lifetime healthcare, totaling an overwhelming debt of $34 million for the Port Authority. Chapter 9 bankruptcy would allow the Port Authority the opportunity to reject union collective bargaining agreements and renegotiate a more feasible contract to reduce the crippling legacy costs currently facing the Authority. Furthermore, the protections offered by Chapter 9 would allow the Port Authority to renegotiate its contract with the current transit workers.
As was done in the GM and Chrysler cases, the State could establish an oversight board to oversee the bankruptcy proceedings and assure a successful reorganization. This step is critical, especially in light of the fact that the board of directors of the Port Authority may, on its own, refuse to file for bankruptcy. (See, State Must Act Now to Fix the Port Authority, Policy Brief of the Allegheny Institute for Public Policy, November 29, 2010, Volume 10, Number 65, www.alleghenyinstitute.org). Hopefully, the board will take its fiduciary role seriously and choose to take the Port Authority through Chapter 9.
As an incentive to file for bankruptcy, the Governor should hold out the carrot of dedicated funding. The State could use the ability to “regulate by deal” to force a restructure of the Port Authority’s operations and collective bargaining agreements. As part of a confirmed Chapter 9 bankruptcy plan that successfully restructures legacy costs and operations, the State could commit (in a legally binding document) to provide dedicated funding so long as certain approved operating budgets are met in succeeding years. This would provide taxpayers the comfort they are looking for that the Port Authority is not a bottomless pit for taxpayer money. At the same time, the Port Authority would be able to create long term budgets and service plans relying on dedicated State funding. In short, the State would not write a blank check, but in exchange would guarantee that an agreed upon reasonable check would be written every year from State coffers.
Intervention by the Governor would serve as a powerful negotiation tool. Rather than face the risk and probability of having their contracts rejected through the bankruptcy process, the unions and transit workers would have the strong motivation to negotiate in good faith with the Port Authority as part of the bankruptcy process.
Chapter 9 bankruptcy is a powerful tool that should be considered by the Governor and the Pennsylvania legislature in dealing with the enormous deficit facing Allegheny County’s Port Authority. By involving the government in the restructuring of the Port Authority under Chapter 9, the Port Authority can emerge from bankruptcy as a revitalized authority to better serve the needs of the community at large.
Maribeth Thomas, Esquire, an associate in the firm’s bankruptcy and restructuring practice group, assisted in the drafting of this article.