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International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 69

MUNICIPAL FISCAL STRESS: SELECTED MAJOR CASES OF

THE 21ST CENTURY

Joshua R. Zender

Humboldt State University

Keren H. Deal

Auburn University Montgomery

ABSTRACT

While considered uncommon in relation to U.S. corporate bankruptcies, an increasing

number of Chapter 9 municipal defaults have occurred in the past twenty-five years. Bankruptcy

has been voluntarily sought and, in most cases, successfully executed to overcome fiscal stress in

U.S. cities of all sizes. This paper recounts the complex tale of the three largest U.S. public fiscal

crises within the early 21st century: the City of San Diego, California, Jefferson County, Alabama,

and the City of Detroit, Michigan. Fiscal stress in a local government threatens the quality of

municipal services and diminishes citizen confidence in their local leadership. The cases

illustrated in this paper highlight the continued importance of studying the reasons for and

solutions deployed to overcome fiscal stress conditions in local government. The research findings

are of particular relevance to fiscal officers hoping to avert similar emergencies today. Keywords: Accounting, bankruptcy, case study, public finance, public administration

INTRODUCTION

Municipal bond offerings are, historically speaking, attractive to investors due to their

tax-exempt status and perceived safety. As Whitford and Burke (2008) note, “municipalities are

not supposed to go bankrupt and rarely do” (p. 114). Ongoing studies of municipal bankruptcies

performed by industry-recognized expert Spiotto (2015), states that over 662 municipal

bankruptcy filings have occurred since 1934. This figure equates to less than one percent of all

governments (p. 2). While infrequent in nature, incidents of fiscal distress tend to create high

volatility within credit markets.

According to the Federal Reserve (2015), municipal bonds represents nearly 7% of all

domestically held debt outstanding. Weil (2013) highlights that quantitative easing was not only

to blame for depressed municipal bond prices in early 2013, but also concerns over cities

solvency. When one large municipal entity experiences fiscal distress, some fear a contagion

effect could ripple across all debt issuers (Whitney, 2010). According to Warren Buffet (2010),

guaranteeing municipal bonds against default “has the look today of a dangerous business”

(Frye, 2010, p. 1).

State governments offer some protection in preventing and managing local government

fiscal crisis. For example, they can establish local borrowing caps, implement refunding

programs, and establish state oversight boards. Nonetheless, there remains wide variation from

state to state in the scope and quality of these controls. One voluntary form of protection to

adjust debts, without disrupting operations, is Chapter 9 bankruptcy. Twenty-seven states

specifically offer their local governments this alternative if the entity meets statutory

requirements. In this study, the three largest cases of municipal financial distress of the 21st

century are examined in-depth.

70 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

LITERATURE REVIEW

While few municipalities have actually defaulted, there have been several cases of

municipal fiscal stress within the past fifty years. In the mid-1970s, New York City became

controlled by a state fiscal control board due to reckless financial management. “Between 1969

and 1973, in every year but one the city ran a large budget deficit which it papered over with

various accounting gimmicks” (Shefter, 1992, p. 106). In 1978, Cleveland, OH became the first

entity to default on general obligation bonds (Spiotto, 2015). In 1985, the Washington Public

Power Supply System defaulted on $2.25 billion in loans and was permanently dissolved

(Whitford & Burke, 2008). Bridgeport, CT attempted to file for Chapter 9, but the petition was

dismissed after financial misrepresentations were detected (Lanchner, 1991); thus, leading to

reforms in the bankruptcy code. In 1994, Orange County became the largest municipality in

United States to date to declare bankruptcy due to the severe losses from its highly leveraged

$1.6 billion dollar investment pool (Public Policy Institute of California, 1998). Stockton, CA

and San Bernardino, CA serve as two contemporary bankruptcy cases. Each of these incidents

caught the focus of the public eye and, as a consequence, initiated public policy conversations

that changed government financial management practices for years to come.

State and local debt outstanding, which can take the form of full-faith and credit or

nonguaranteed liabilities, has grown rapidly in the past forty years. Exploding from $175 billion

in 1972 to $2,942 billion in 2012 (Federal Reserve, 2015). Consequently, municipal bonds are

subject to the same general regulatory measures of the SEC, as all other public debt and equity

issues (Lee, Johnson, and Joyce, 2004, p. 459). In his Congressional Research Service Report

that argued for the need for Sarbanes-Oxley Act, Jickling (2002) observed “the best way to

protect investors from fraud, hype, and irrational exuberance is to require organizations selling

stocks and bonds to the public to disclose detailed information about their financial strengths and

weaknesses. Without complete and accurate information, investors cannot make rational

decisions” (p. 1). An entity’s perceived fiscal condition as reflected within the financial

statements is of keen interest to the investment community.

In 1973, the Advisory Commission on Intergovernmental Relations (ACIR) studied the

financial condition of 30 major cities in the United States in an attempt to identify factors that

contributed to the fiscal decline in local governments. The study found that severe financial

emergencies were not only a consequence of bond defaults, but also a result of not meeting

payroll, pension benefits, and payments to suppliers (1973, p.75). The Commission concluded

that “unsound financial management stands out as one of the most important potential causes of

financial emergencies in local governments” (1973, p.5). In 1985, the ACIR found local

governments under fiscal stress were also dealing with court judgments, losses in real estate

development districts, and changes in intergovernmental fiscal relations with a higher

government. However, the Commission maintained that financial mismanagement, along with

inadequate planning, was still a primary factor of financial strain which may lead to bankruptcy,

default and a combination of both in local government (1985, pp. 7-16).

Deal, Kamnikar and Heier (2013) revisited the ACIR 1973 and 1985 study to consider

whether the study’s eight warning signs of fiscal stress were prevalent in current municipal

bankruptcy cases and concluded that ACIR’s findings were profoundly prophetic towards

predicting government financial emergencies forty years later. While bankruptcy cases were

unique, each case highlighted that unsound financial management is one of the most important

potential causes of financial emergencies in local governments. Park (2004) created and tested a

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 71

multi-dimensional causal model from three perspectives: short-run and long-run factors, internal

and external factors, and political and economic factors. The author focused his study on

whether these factors were present in five bankruptcies that were filed by various forms of local

government during the period 1977-1994. Park’s results found that “… bankruptcy is a form of

government failure, not just a market failure” (p. 251). Essentially, Park determined that

political pressures play a greater role than economic conditions in the financial failures of local

governments.

Watson, Handley, and Hassett (2005) studied the City of Prichard, Alabama in 1999. The

authors identified five socio-economic conditions they believe were significant contributors to

fiscal stress in local governments - financial mismanagement, decline in population, rising per

capita costs, structural change in the economic base, natural or man-made disasters, and civic

distrust. The authors cited financial mismanagement as the most common factor and inferred

that Prichard could have avoided bankruptcy if not for the political and managerial impediments

experienced by the city (pp. 137-148). Landry (2007) conducted a comparative analysis of the

only two counties that had filed for Chapter 9 protection as of 2007, Orange County, California

(1994) and Greene County, Alabama (1996), and found that each government relied on revenue

sources that were risky, and those revenues funded a large portion of their governmental

operations. Landry emphasized both local governments had one commonality in that leadership

of the county governments was ineffective and unwilling to plan for the future financial health of

the local governments (p. 18).

Munnel, Aubrey, Hurwitz, and Cafarelli (2013) recently considered whether publicly-

funded pensions were the cause of fiscal stress in local governments. The study analyzed eight

variables covering management, economic, and pension factors from 2008 to 2013. They found

fiscal stress, and ultimately bankruptcy, was present in local governments who were able to carry

deficits, maintained low cash balances, and/or had issued a Pension Obligation Bond in recent

history. In addition, those localities that experienced higher unemployment coupled with

foreclosures and population decline were exposed to a higher probability of fiscal stress.

Interestingly, studies conducted after 2010 continued to support ACIR and other literature that

suggests fiscal mismanagement is one of the leading, if not main, contributor of fiscal stress.

RESEARCH OBJECTIVE

Because the purpose of this paper is to explore the root causes of these major adverse

fiscal events, as well as post-crisis reform strategies deployed to stabilize the entities and prevent

future emergencies, large local governments are used as examples in this study. By examining

common themes and patterns, this study advances the collective understanding of causal factors

associated with fiscal stress and controls that can be instituted to manage the aftermath of a

catastrophic event. This paper is framed using a case study procedure of select governments.

According to Yin (2003), case studies can be used to determine “how” and “why” a strategy did

or did not work (p. 7). “The unique strength is its ability to deal with a full variety of evidence”

(Yin, 2003, p. 9). Media, practitioner and academic publications, audit reports, commissioned

studies, and court bankruptcy proceedings served as primary sources of information for this

study.

San Diego, Detroit, and Jefferson County were selected as examples for analysis because

they represent the largest jurisdictions in the 21st century to encounter fiscal stress. As to the

financial magnitude, these cases are historically unprecedented. Billions of dollars in liabilities

72 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

are being disputed, settled or discharged. Further, due to the complexity of these cases, millions

of dollars in unanticipated legal and accounting costs have been incurred and will continue to

mount for these tax jurisdictions as presented in Table 1.

Table 1

Financial Positions and Debts Outstanding Cities / Counties Critical

Point of

Fiscal

Distress

Total Assets* Total Net

Revenues*

Settlement /

Outstanding

Debt*

Audit &

Legal Fees

City of San Diego, CA

(Pop. 1,307,402, #8,

U.S. Census 2010)

Jan., 2003

(Gleason

lawsuit)

$10,284,432,000 $936,986,000 $3,640,443,000** $5,000,000+

City of Detroit, MI

(Pop. 713,777, #18,

U.S. Census 2010)

July, 2013

(Chapter 9

bankruptcy

filing)

$9,810,406,826 $730,520,148 $10,488,585,046 $25,000,000+

Jefferson County, AL

(Pop. 658,466, #93,

U.S. Census 2010)

Nov., 2011

(Chapter 9

bankruptcy

filing)

$3,927,183,000 $376,396,000 $4,485,493,000 $30,000,000+

*Fiscal data as of the critical date of fiscal distress (e.g., 2003, 2011, 2013) - not adjusted for inflationary purposes.

**Excludes over $2.5 billion in other estimated liabilities that were not required to be disclosed under GASB

standards at that time.

Data Source: Comprehensive Annual Financial Report(s) for: 1) City of San Diego, 2003, pp. 42-45; 2) City of

Detroit, 2013, pp. 35-37; 3) Jefferson County, 2012, pp. 7-10.

The significance of these events is without question. Moody’s rating agency has

indicated that “Detroit’s bankruptcy could set a standard, if not a legal precedent, for how other

distressed cities approach their long-term liabilities, especially the relative seniority of pension

versus debt obligations” (Devitt, 2013, p. 4). When comparing the relative financial positions of

the three local governments used in the sample, a few notable observations are revealed:

 San Diego represented the largest governmental entity to experience fiscal stress;

 Detroit had amassed the largest outstanding debts; and

 Jefferson County had incurred the most in audit and legal fees to resolve the crisis despite being much smaller than the other two entities.

City of San Diego

By all economic measures, the City of San Diego should have had little reason to

encounter financial stress at the dawn of the 21st century. The housing market was appreciating

at an exponential rate, the high-tech industry including bio-technology was rapidly expanding,

and the unemployment rate stood at 4.3% as job growth was projected to exceed 23% (Sperling

and Sander, 2004, p. 613). City Hall proclaimed itself “the most efficiently run city in

California” (Ritter, 2004, p. 1). Given this context, there were few “red flags” for investors to

suggest that the City of San Diego’s government was headed for financial ruin. However, City

officials were hiding an increasingly bleak financial position by presenting “misleading,

inaccurate, and unreliable financial statements and debt financing disclosures” (Kroll, 2006, p.

240). Only a few months later, a front page article in USA Today published October 24, 2004

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 73

proclaimed, “America’s Finest City has become ‘Enron by the Sea’ as Wall Street bond

underwriters claim city officials duped them. The city’s credit rating has tanked, costing

millions” (Ritter, 2004, p.1).

The City of San Diego’s problems began after officials failed to disclose material facts in

the City’s financial statements. Few people realized the risks the City was taking until

investment returns declined during the stock market plunge in 2002 and subsequent downturn in

the housing market.

However, an outspoken critic of the City’s administrative affairs and a pension board

trustee had alerted federal authorities. Shortly thereafter, the City acknowledged it had made

errors and omissions in its financial statements (Ritter, 2004, p. 5). Amid the controversy the

City’s Mayor would step down from his position, resulting in two successive interim mayors in

2005. Additionally, two city council members were convicted of extortion and conspiracy to

commit wire fraud and resigned from their public offices. All said, the City’s problems “led to

federal investigations, five indictments of former pension officials by a federal grand jury and a

finding by the Securities and Exchange Commission that unidentified city officials committed

securities fraud by including woefully inaccurate financial disclosures in bond offerings” (Hall,

2007, A1).

Although default is rare, the safety of the bond is largely based upon the financial

condition of the entity issuing the bond. Investors rely heavily on standard bond ratings provided

by independent services, such as Fitch Investors Services L.P., Moody’s Investor Service, and

Standard and Poor’s Corporation. In 2002, the City went from Fitch’s AAA to BBB rating plus,

an unheard of reduction of seven levels of credit risk. In 2004, Standard & Poor’s suspended the

city’s credit rating entirely (Hall, 2007, A14).

In addition to the toll placed on the City’s borrowing capacity, slow progress was made

on deferred maintenance needs and construction projects, the City became mired in external

investigations. For instance, both the United States Attorney’s Office and Securities and

Exchange Commission launched formal inquiries into the City’s disclosures, retirement funding,

sewer rate policies, and bond offering disclosures. Overseeing the Kroll investigation was a

newly formed three-member Audit Committee consisting of former SEC Chairman Arthur

Levitt, Lynn Turner and Troy Dahlberg. The investigation commissioned by the committee

revealed serious deficiencies and abuse within the City. According to the report, the Committee

came to four general conclusions:

 the City was not paying enough out of its current year budget to fund the pension and retirement health benefits;

 pension obligations were dramatically increasing and would continue to increase;

 retirement surplus earnings would be insufficient to pay for retiree health benefits;

 a growing unfunded liability was mounting within the retirement fund. The committee found that City officials had “undeniably influenced” (Kroll, p. 54)

stakeholders efforts to disclose critical information about the City’s financial health, such as the

breach of a required 82.3% funding floor of its pension established by MP-1 (Kroll, p. 57).

According to the Securities and Exchange Commission, City of San Diego officials deliberately

concealed certain facts from the bond rating agencies. For example, the City’s auditor, Mr.

Ryan, stated in an email “when we book the Net Pension Obligation (NPO) [showing the

shortfall between the actuarially calculated contribution and what the City paid] the rating

agencies won’t like it. It will be a negative for the City. As we market a large amount of bonds

it might cost us a lot of money. Not quantifiable at the moment.” The assistant Auditor and

74 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

Comptroller, Ms. Webster subsequently wrote in an email, “…my biggest suggestion to her is to

eliminate any reference to Fitch and rating agencies… this letter will be seen by press and the

city does not need to telegraph its pension problems to the rating agencies who don’t research the

topic to any great level now” (Kroll, p. 217). According to one email, “…these are SERIOUS

consequences and needs attention” (Kroll, p. 63). Despite knowledge of increased pension

obligations, City officials deliberately withheld these projections from the investing public, as

well as the citizenry.

Based on independent investigations by Kroll and the SEC, a motive to under fund the

pension system appeared to be driven by city officials’ own financial interests. Over a ten year

period, the City’s Net Pension Obligation ballooned nearly 900% (SEC, 2006, p.11). “Board

members who were also pension plan participants (i.e., City employees) voted to approve a

contract in which they held a financial interest- namely, their own enhanced pension benefits” in

violation of California law section 1090 (Kroll, p. 113). The investigation revealed the parties

violated Section 10(b) of the Securities Exchange Act of 1934. Top officials with culpability

included the Deputy City Manager, City Treasurer, Auditor and Comptroller, SDCERS

Administrator, Utilities Finance Administrator, Deputy Director, and Deputy City Attorney.

Several other city representatives were identified as being negligent or breaching their fiduciary

responsibilities (p. 238). The Securities and Exchange Commission (2006) concurred

concluding “the City violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange

Act and Rule 10b-5” due to untrue statements of material fact material fact relating to the offer

or sale of securities” (p. 3). The California Supreme Court ruled decisively that this had the

effect of shifting present retirement costs on to future taxpayers and the practice was found to be

unconstitutional

KPMG’s 2003 audit of San Diego’s financial statements, included “a staggering 66

restatements, or acknowledgements of mistakes from 2002, totaling nearly $1.8 billion” (Hall,

2007, A1). City officials concealed underfunding of its pension system from investors by taking

advantage of malleable pension accounting standards in place at that time. GASB, at that time,

permitted the City to: 1) choose among six different actuarial methods; 2) elect long amortization

periods for the recognition of unfunded liabilities; 3) actuarial valuation on a biennial basis as

opposed to an annual basis (Kroll, p. 200). Pension accounting standards have since been

strengthened. If GASB statement 67 and 68 had been in place and fully adopted, the City would

have been forced to disclose billions of additional dollars in pension liabilities.

Legal investigations which ensued not only revealed apparent violations of law relating to

the pension crisis, but also other facets of the City’s operations. For instance, “the City has

demonstrated a history of noncompliance with the Internal Revenue Code (IRC) in the manner in

which it funds and administers healthcare benefits for employees” (Kroll, p. 102). These

practices had unnecessarily exposed the city to numerous employer-related tax penalties and

fines. Additionally, the City had received grants and loans from the Environmental Protection

Agency (EPA) to assist it with various capital improvement projects. As a participant in the

program, the City was required to comply with the Clean Water Act (CWA); however, over $265

million dollars in grant money to subsidize the cost of wastewater construction projects was out

of compliance.

As a result of the aforementioned events, the City had been in violation of CWA, which

required municipalities to structure their rates in a proportionate manner (as opposed to using

residential fees to subsidize industrial users). Then-City Mayor Dick Murphy had managed to

mask the inequitable structure, in part, by persuading the City Council to approve a water billing

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 75

system based on an unprecedented estimated billing structure “the city began estimating water

use every other month in September 2003. Within 18 months, it had amassed $571,000 that

didn’t belong to it, causing many customers to believe the switch was done to help with cash

flow at a time when San Diego’s credit was shot and borrowing was difficult… Consequently,

the city collectively overcharged water users more than $1.6 million, issuing nearly 790,000

credits while adjusting only 3,500 accounts (Hall, 2007, B4).

Additionally, the City lacked sufficient regulatory oversight or adequate internal controls

to detect material discrepancies. In essence, City officials were able to work within the shades of

gray and bend the rules to suit their own financial interests much like the questionable activities

that led to the fall of Enron. In summary, the events which transpired occurred within an

environment where limited guidelines or standards had been established to clearly spell out the

legal and ethical responsibilities of the City’s top officials. These events put the city in severe

financial distress. All said the city’s fiscal problems included a $1 billion pension deficit, a

shortfall of almost $1.4 billion for retiree health care and nearly $900 million in deferred

maintenance needs (Hall, 2007, B3).

The financial deals worked out between City and pension officials in the early part of the

21st century were effective at providing some short-term relief at the time, but the long-term

consequences of these actions continue to plague the City. The City has been haunted by

negative press since the height of the event. In 2005, former Mayor Dick Murphy was ranked

one of the three worst big-city mayors behind Detroit’s Mayor Kwame Kilpatrick by Time

magazine. Meanwhile, the financial liabilities accrued continue to weigh-on the City’s long-term

financial condition and sustainability. According to the City of San Diego’s 2014 comprehensive

annual financial report, the City faces a $2.2 billion dollar pension and $0.5 billion dollar other

post-retirement benefit deficit(s).

Jefferson County

Alabama’s most populous county, Jefferson County, would face its own credit crisis due

to similar forms of financial mismanagement and public corruption as San Diego. Howell-

Maroney and Hall (2011) identified three critical stages to the County’s financial collapse: first,

a series of costly court rulings, including the consent decree and mandated capital upgrades;

second, to finance debt executive leadership engaged in a series of risky short-term financing

solutions to avoid discontent over rate increases; third, the implosion of this financial

arrangement occurred in conjunction with the 2008 national housing crisis created a cash crisis

for the entity (p. 233).

Similar to San Diego, the County’s financial liabilities escalated in 1996 when a federal

court ordered repairs to its sewer system that had released raw refuse into the Cahaba River in

violation of the CWA. After an attempt to drill a sewer tunnel under the river failed, the County

engaged in a more costly effort to completely rebuild the aging sewer system; however, this

stage was beset by corruption (Sigo, 2014a). Maroney and Hall (2011) note that many the costs

incurred during the second stage of the project were attributable to mismanagement,

noncompetitive bidding practices, and outright corruption (p. 236).

An analysis by the Birmingham News estimated that “one-third of the sewer upgrade

projects were not required by the consent decree” (Maroney & Hall, 2011, p. 236). By 2000, the

County was in about $3.2 billion in debt or “nearly 100 times the Sewer department’s annual

capital budget” making the County’s debt outstanding sixth largest in the country (Rosell, Sun, &

76 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

Reese, 2012, p.1). Meanwhile, the County faced additional liabilities including a Court-ordered

consent decree to resolve discriminatory human resource practices. Unlike the vibrant economic

climate of the City of San Diego, Jefferson County had been faced with on-going economic

pressures with the downsizing of the steel industry since the late 1970s.

County leadership knew they would be unable to raise taxes or utility rates on the

impoverished communities; therefore, they elected to delay interest payments on the $4.6 billion

dollars of debt (Velasco, 2005). Local governments rely upon debt to finance infrastructure and

other long-term capital needs. Between 1999 and 2003, the County issued a series of General

Obligation and Revenue Bonds. General obligation debt is generally considered backed by the

full-faith and credit of the taxpayer. Meanwhile, revenue debt is considered non-guaranteed.

However, standards do vary from state to state. Maroney and Hall (2011) research finds that

general obligation debt in Alabama is subject to voter approval and to caps, defined as a

percentage of the assessed property value. However, no referendum is required when the public

improvements meet certain revenue bond criteria according to Section 11-81-110(a) of the

Alabama state constitution (p. 234).

In an effort to shoulder the massive increase in debt without raising rates, the county

sought to creatively refinance this debt through engaging in variable and auction rate securities

transactions that promised to lower short-term interest rates. Referred to as a swap contract the

debtor essentially transfers its obligation to pay its own debt service with a counterparty, such as

a bank (Vogt 2004, p. 397). In essence, exchanging fixed debt with variable rate debt.

Consequently, the County executed over two billion in swap contracts with Bear Stearns, Bank

of America, and J.P. Morgan (Selway and Braun, 2008). One independent analysis showed that

the county paid $120 million in swap fees, nearly six times ordinary costs (Sigo, 2007a). Major

bond issuances of this period include:

• 1999- $952 million in additional warrants

• 2001- $275 million in warrants

• 2002- $949 million in warrants (refunding portions of the 97, 99, and 01 warrants)

• 2003- $2.24 billion in auction rate revenue bonds.

A leading champion of debt swap arrangements was County Commission Chairman,

Larry Langford. Mr. Langford was the former mayor of Fairfield, AL and led efforts to build an

amusement park called Visionland, a public authority controlled by eleven municipalities in the

Jefferson County area. As a precursor to Jefferson County, Visionland would ultimately default

on $100 million dollars and file for municipal bankruptcy just a few years into its operating cycle

(Deal, et. al, 2011). Under the advisement of a JP Morgan swap advisor and broker, Charles E.

LeCroy, Langford authorized over 11 swaps between 2001 and 2003 for the County. Under the

arrangement, Langford was receiving gifts and kickbacks for altering the county’s debt portfolio

to a riskier class. He would ultimately be prosecuted for bribery and fraud charges and is

currently serving a 15-year prison sentence. William Blount, an investment banker and the

former chairman of Blount Parrish & Co. Inc., pled guilty to paying $241,000 to Larry Langford

and is also serving time in federal prison (Braun, 2010a).

McCampbell (2012) highlights the corruption problem at Jefferson County was much

broader than simply Langford in that over 26 local leaders would later be convicted for similar

crimes. Gary White, former Jefferson County Commissioner, was also sentenced to ten years for

accepting bribes related to the sewer system bonds from the President of United States

Infrastructure Inc., which held over $50 million in contracts with the County. In addition, “at

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 77

least 21 contractors and former county officials have been indicted or convicted of federal crimes

in the building and financing of the sewer system” (Braun, 2010b, p. 5).

Investment bankers were also culpable in creating a crisis by raking in soaring

commissions and fees at a time when the County’s debts were mounting. According to an

analysis by Porter White, the county ended up being overcharged a total of $100 million by J.P.

Morgan and other issuers for its $5.6 billion in swaps (Whitford & Burke, 2008). Mr. LeCroy

would later be convicted of wire fraud and sentenced to three months in federal prison in

connection with a public corruption scandal in Philadelphia (Dewan, 2009). He also faces

charges related to his activities within Jefferson County. “LeCroy is currently contesting the

SEC's jurisdiction over swaps, and arguing that a statute of limitations to bring charges against

him has expired. The trial for LeCroy could take place by mid-year 2015” (Sigo, 2014a, p. 1)

Behunek (2010) highlights the refinancing of the debt to floating rate bonds, guaranteed

by Financial Guaranty Insurance Corp and Syncora, led to an investment scheme similar to the

national variable rate subprime mortgage crisis of 2008. The scheme involved a complex set of

conditions that were designed to hedge against the fluctuating interest rates. However, these

schemes did not produce prosperous results and ended up costing the county and its partners in

more way than one way. Whitford and Burke (2008) note that Jefferson County wound up with

68% of its debt in auction-rate securities, instruments for which the interest rates are regularly

reset. When that market froze in 2008, effective rates on the County’s debt exploded. Bond

insurers’ credit rating was cut to junk bond status in turn causing Jefferson County’s interest

costs to more than triple to 10% (Braun, 2010a). Like San Diego, the credit rating agencies,

Standard and Poor’s (S&P) and Moody’s, cut the ratings of the Jefferson County sewer bonds

whereby S&P cut the rate by six levels to B, five steps below top investment grade and Moody’s

cut them by three levels to Baaa3 (Braun, 2010a).

On June 16, 2010, Financial Guaranty sued JPMorgan Chase & Co for $378 million in

coverage (Behunek, 2010). “Syncora Guaranty Inc. also sued JPMorgan and the county on April

29, 2010 on charges of fraudulently obtaining more than $1 billion in insurance coverage on the

sewer bonds” (Braun, 2010a, p. 2). Without admitting or denying the charges, JP Morgan settled

“paying the County $50 million and forfeiting more than $647 million in termination fees” and

“paid $25 million to the SEC's Fair Fund to compensate those harmed by the scheme” (Sigo,

2014a). This act was viewed by many as a favorable compromise by J.P. Morgan.

The ultimate financial toll of these events would be the pain felt by utility rate customers

served by the County. “The average household’s sewer bill rose from $13.48 per month (1995)

to $62.90 per month (2008), an increase of more than 368 percent” (Howell-Maroney and Hall,

p. 236). On September 22, 2010, a Birmingham circuit court judge stepped in and appointed,

John S. Young, to act as a receiver. In his new role, Mr. Young had the power to raise rates and

increase revenues to pay off Jefferson County’s $3.2 billion sewer debt. The Commission

opposed this appointment according to the court papers and Young would ultimately resign from

the role in 2013, creating greater concerns over accountability.

Sigo (2014a) notes “the stage for Jefferson County's financial meltdown was essentially

set in early 2008 when Jefferson County's $3.2 billion of variable- and auction-rate sewer

warrants collapsed along with associated interest-rate swaps when liquidity in the bond market

dried up amid the global financial crisis” (p. 1-1). However, the ultimate nail in the coffin was

an indifferent state government. While a futile attempt was made to secure bailout monies at the

State level and retain an occupational license tax, Alabama lawmakers refused to help, in part

78 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

due to state constitutional limitations on state bailout relief, pushing the County into filing for

bankruptcy.

Jefferson County filed for Chapter 9 bankruptcy in November 2011 with $4.2 billion of

municipal debt, $3.1 billion relating to defaulted sewer warrants. A cornerstone of the

agreement was to refund $1.3 billion of this remaining debt. Bankrupt investment banks, such as

Bear Stearns and Lehman Brothers, were the biggest counterparties in these derivative activities.

The filing represented the nation’s largest municipal bankruptcy in history, but has since been

eclipsed by the City of Detroit. According to the County’s Plan of Adjustment (2013), there

were other significant events that also contributed to the financial decline of the county outside

of the complex derivatives and swap contracts. These included the loss of an occupational tax

which provided approximately 40 percent of the county’s administration and police services

funding, the April 27, 2011 tornadoes with a clean-up cost of over $25 million, and the sewer

debt crisis listing the EPA Consent Decree of 1996 as a significant unfunded mandate on the

County’s financial situation (U.S. Bankruptcy Court - Jefferson County Plan of Adjustment,

2013, pp. 1 – 84).

Similar to the City of San Diego, Jefferson County had seen its audit fees explode. On

August 10th, the County Commission agreed to spend $647,000 for a long-awaited fiscal year

2008 audit. In 2013, the County would finally receive its long delayed audit reports. However,

Sigo argues that the reports have not necessarily improved transparency. For instance, “the

county opted to forego the management's discussion and analysis required by Governmental

Accounting Standards Board as it has for at least the last six years and no adjustments to the

financial statements have been made as a result of the county emerging from bankruptcy” (Sigo,

2014b, p. 1-1). Failure to comply with Government Accounting Standard Board (GASB)

Statement 34 is unusual for an entity of this size.

While Jefferson County officially exited Chapter 9 on December 3, 2013, the proceedings

did not prove to be a quick fix. Several appeals remain outstanding mainly from sewer

customers. Over $30 million has already been spent in legal fees and the County’s

administration admits that additional sewer system improvements will likely be needed which

cannot be entirely funded by the rate increases. Spiotto (2015) highlights that dealing with

financial distress requires not merely short-term actions to increase tax revenues and lower costs,

but long-term reinvestment in the public infrastructure. Furthermore, the capacity for Jefferson

County to expand social services and stimulate private business growth have been severely

limited due to the crisis. Full recovery efforts will likely span several years.

City of Detroit

While mismanagement, corruption, and labor issues accelerated the City of Detroit’s

financial troubles, the primary catalyst involved a deteriorating property tax base due to

population decline. According to the Desilver (2013), the city has lost over 60% of its

population since its peak in the 1950s with greatest population declines occurring in the past

decade. Not surprisingly, social service systems have struggled. According to government

reports, police and fire response times are slow, many schools are among the worst in the

country, and tens of thousands abandoned buildings remain within the City’s jurisdiction.

Zender, Chen, and Zhang (2014) note while American manufacturing has been in decline since

the 1980s, the greater Detroit region has been among the hardest hit losing over 60,000 auto

manufacturing jobs the past twenty years.

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 79

As a consequence of declining tax revenues, the City has been forced to borrow billions

of dollars to close annual budget shortfalls. Detroit’s largest outstanding obligations relate to its

pension systems. Williamson (2013) indicates the “City of Detroit Retirement System is made

up of the General Retirement System of the City of Detroit with $2.77 billion, and the Police and

Fire Retirement System of the City of Detroit, with $3.4 billion” (p. 6), which represent

approximately 14% of the City’s outstanding liabilities. According to Morningstar, the average

city public pension plan has a funding ratio of 76%; however, Detroit funding status has floated

below 60% the past ten years (Barkley, 2013, p. 2).

In addition to failure to adequately fund the trust account, fraud on the pension board has

only compounded matters. For example, pension trustees were listed as fraud participants in the

City’s $200 million pension fund kickback scheme. Hundreds of thousands of dollars in gifts

and in-kind valuables were offered to the trustees from people seeking investments in the Police

and Fire Retirement System. Consequently, Detroit’s former Mayor Kwame Kilpatrick was

sentenced in 2013 to over 25 years in prison for his involvement in the scheme, as well as several

other acts of corruption during his tenure in office (Giardina, 2013, p. 6-6).

Outside of these pension issues, the City also buried itself in debt to finance public

infrastructure projects (e.g., street, water, and sewer upgrades). When the City faced pressure to

make interest payments in late 2005, they engaged in a series of complex and risky short-term

security deals valued at over $1.4 billion; in essence, following a similar strategy as Jefferson

County leadership. During the financial crisis of 2008, variable rates exploded and investors

demanded full payment creating liquidity problems. Foroohar (2014) notes the “biggest

contributing factor to the increase in Detroit’s legacy expenses was its mounting debt” (p. 27).

In an effort to control the bleeding, the City was placed under fiscal oversight by the

State government. An emergency manager, Kevyn Orr, would be charged with leading the City

back to financial stability by Michigan Governor Rick Snyder, a Certified Public Accountant

(CPA). Efforts to avoid bankruptcy included a plan to sell some of the City’s most valuable

assets, such as its airport, other component units, and even the City’s treasured art collection.

Maynard (2014) highlights a plan to sell artwork from the Detroit’s Institute of Arts was valued

up to $867 million. Other debt restructuring plans included eliminating pension benefits

altogether or seeking a federal bailout. Despite repeated proposals to cut programs and raise

revenues, Orr was unable to dig the beleaguered City out of its $18 billion dollars in debt.

Interestingly, Mr. Orr, Detroit’s gubernatorial appointed emergency manager, was appointed by

New Jersey Governor Chris Christie in January of 2015 to serve as a part-time advisor as

Atlantic City, NJ which faces its own fiscal stress due in part to loss of casino gaming revenues.

Detroit officials made an initial attempt to settle over $800 million dollars in derivatives

with the investment community, but the plan fell apart. Ultimately, financial institutions would

settle for a fraction of that amount. Calls for bankruptcy, an option of last resort, grew stronger.

“Municipalities are protected under state -- rather than federal -- law, and the 10th amendment

preserves powers not covered in the US constitution as a state rather than a federal matter. Even

though US bankruptcy courts are federal, bankruptcy proceedings are not part of the constitution,

meaning federal courts cannot dictate state proceedings” (Sheen, 2013). Ultimately, on July 18th,

2013, Detroit filed for Chapter 9 bankruptcy, which represented the largest municipal bankruptcy

in U.S. history to date.

Detroit’s eighth amended Plan of Adjustment, filed October 22, 2014, provided for

adjustment of $18 billion in secured and unsecured debt as well as plans to invest $1.5 billion

over a 10 year period to improve municipal services, such as police and fire protection, economic

80 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

development, and improve the information technology systems for the municipality. When

referring to the Detroit situation, Judge Steven Rhodes used the phrase “service delivery

insolvency” referring to the City as being “unable to provide basic municipal services such as

police, fire, and EMS services to protect the health and safety of the people.” Despite a lengthy

and costly process, the bankruptcy proceedings have established new precedents for future debt

issuances within the State of Michigan.

While the City has officially exited from Chapter 9, the state, city officials, and economic

developers continue to work towards finding common ground in avoiding another fiscal disaster.

Unlike Jefferson County’s experience, the State of Michigan has played an important role in the

recovery. As part of the plan, the State of Michigan agreed to assist in subsidizing the City’s

pension funds with an immediate payment of $194.8 million. Furthermore, Detroit remains

under state fiscal oversight.

IMPLICATIONS OF FINANCIAL RECOVERY EFFORTS

While the downfall of these jurisdictions has been extensively focused on within the

media, there remains an interesting story to be told relating to how these jurisdictions have

emerged from financial ruin. The financial strategies deployed reflect broader progressive

reform initiatives occurring within the U.S. economy.

Voluntary Adoption of Sarbanes-Oxley Act Provisions

In many respects, these initiatives are a reflection of wider regulatory transformations

occurring within the private sector at time. For instance, the City of San Diego embraced

Sarbanes-Oxley Act (SOA) type provisions, closely modeled after the reforms adopted by

corporations in the earlier part of the 21st century after the Enron and WorldCom frauds (City of

San Diego, 2009).

Examples of such adaptations included:

 creation of an audit committee;

 auditor independence;

 financial certification by city officials and stronger internal control assessments;

 robust deterrence (increased penalties);

 enhanced disclosure;

 code of ethics and whistle-blower protection The City of San Diego did not have a working audit committee until after the financial

emergency and ensuing investigations. If an audit committee would have been in existence

throughout the 1990s, this body could have established internal procedures for receiving and

reacting to accounting or internal control complaints, such as concerns of employees. Likewise,

auditor independence issues could have been avoided. The City’s external auditor, Caporicci &

Larson LLP, was explicitly influenced by City officials and through performance of non-audit

services. The firm issued unqualified opinions (e.g., clean opinions) on the City’s financial

statements between the fiscal periods of 1996 through 2002 when in fact there had been

inadequate disclosure and several accounting irregularities revealed by investigations conducted

prior to 2002.

In addition, City officials had little to no culpability in the preparation of financial

statements. In reality, the events which transpired cannot be attributed to any one period or any

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 81

one party, but rather “call into question both the management of the City’s financial accounting

systems, and, at core, whether anyone was accountable” (Kroll, p. 240). For example, when the

City’s 1996 CAFR was published, the document indicated the City paid for post-retirement

healthcare benefits when in fact the statement was false. Nonetheless, this inaccurate disclosure

remained in the financial statements each subsequent year until 2002 (Kroll, p. B-4). Pinpointing

responsibility within the City is similar to the quagmire posed by Thompson (1985) in finding

the person “morally responsible for a decision or policy” (p. 463) during the financial crisis in

New York City. Section 302 of SOA requires a signing officer to certify in each financial report

submitted that “based on the officer’s knowledge, the report does not contain any untrue

statement of a material fact or omit to state a material fact necessary in order to make the

statements made, in light of the circumstances under which such statements were made, not

misleading” (107th Congress, 2002, p. 33). Such provisions strengthen accountability within local

government.

While falsely certifying a report could potentially create a higher level of public exposure

for a City official, an even stronger deterrent is the threat of heavy penalties or the possibility of

serving jail time. Based upon Lacey, George, and Stoltenberg’s (2005) research “some deterrent

effect on corporate misconduct seems to exist now as a result of the recent ‘spectacle of

executives being handcuffed and hauled off to jail.’ At least superficial evidence of this is

indicated by the fact that since the Enron scandal came to the forefront in 2002, enforcement

actions by the SEC have declined 14.7 percent in future periods” (p. 435). If SOA provisions

had been in effect, fraudulent actions relating to financial statement certification would have

fallen under the U.S. Department of Justice’s jurisdiction and the City officials could have served

jail terms up to 10 to 20 years. These new criminal penalties have created added pressure for the

City officials to disclose all relevant information and ensure financial information contained

within the City’s statements are accurate.

Of all the potential abuses committed by City officials and related parties, the most

apparent violation was their failure to adequately disclose the City’s financial dealings, whether

associated with litigation, funding arrangements with the retirement system, or the City’s sewer

and water contracts. “The City’s deficiencies in accounting, financial reporting, and budget

planning and analysis has resulted in the City issuing numerous financial statements and debt

financing disclosure documents that did not comply with the federal securities laws, GAAP, and

other legal requirements” (Kroll, p. 243). Section 404 of SOA calls upon management to not

only state their responsibility for internal controls, but also perform an assessment of those

controls. In addition to financial disclosure requirements, the City has benefited by requiring its

employees to attest to the effectiveness of internal controls over financial reporting, especially

with respect to meeting its legal obligations.

Throughout the City’s financial problems, there were a host of employees and

stakeholders who could have alleviated the consequences of the activities if there had been an

adequate vehicle to document their reservations. In addition to serving as a communication

mechanism, the whistleblower program provides relief to protect an individual from retaliatory

actions, such as the character assault techniques utilized by City officials during the financial

crisis. Whistle-blower protections now in place exceed those specified within the False Claims

Act, which historically has been restricted to employee claims against federal contractors.

82 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

Strong Court Oversight

San Diego’s solution to stabilize affairs included voluntary adoption of Sarbanes-Oxley

provisions, which served as a key factor in restoring investor confidence and avoiding Chapter 9.

However, such an outlay of time and resources would not be a feasible option for Jefferson

County which found itself intertwined in the global financial crisis of 2008. Initial efforts to

steady the County were modeled after the federal bailouts extended to GM, AIG, and other large

financial institutions at the height of the subprime mortgage financial crisis. At the height of the

emergency, then-Governor Riley contacted Neel Kashkari, a Treasury Department official who

served as the interim leader of the government’s Temporary Asset Relief Program (TARP)

program: “Riley argued that it was urgent that the federal government come to the aid of his

state… the situation was the single biggest threat to the municipal bond market today and a

poster child for how the subprime mortgage crisis is hurting Main Street America (Whitford &

Burke, 2008, p. 114).

To the chagrin of the Governor, Treasury officials had focused their sights on bailing out

some of the largest corporations in America and denied his request for funding due to possible

10th amendment constitutional violations. The Governor then turned his attention to Alabama

lawmakers by attempting to convince the State government to bailout Alabama’s largest county.

However, the State constitution only allows for $300,000 maximum contribution from State

government. As such, this fall back plan ultimately failed which led to the eventual default of

the County (Sigo, 2014a). Meanwhile, the bankruptcy would establish a new precedent of

oversight.

At the core of Jefferson County’s plan for adjustment was a strong provision for Court

supervision. According to Sigo (2014a), “the court retained exclusive jurisdiction over

numerous aspects of the plan, including implementation or enforcement of the approved [sewer]

rate structure, issuance of the new sewer warrants under the new sewer warrant indenture, and

other elements such as decisions to modify, reverse, revoke, or vacate the confirmation order

approving the plan” (p. 1-1). While it is not uncommon for a bankruptcy court to retain

jurisdiction over short period of time, the ability of the court to monitor and enforce sewer rate

increases for decades to come was unprecedented. Plaintiffs wanted to ensure provisions were

made for capital improvements, maintenance, and rates so that the plan had a reasonable

assurance of success.

Despite “significant concern” over the projected cash-flow shortfall for the sewer

system’s capital needs and other concerns around back-loaded debt payments, many creditors

we’re willing to accept significant cuts. Sigo (2013a) notes a host of lawsuits were dismissed as

part of the bankruptcy plan, such as the consent decree of 1982 and appeal to downsize the

county-owned hospital. “JPMorgan also accepted steeper haircuts than other creditors in the

bankruptcy adjustment plan accepting over $1.3 billion in concessions, reducing the County’s

overall indebtedness to $1.9 billion.” (p. 1-6). In an effort to rebuild the municipality’s credit

after the bankruptcy, Jefferson County officials met with bond rating agencies in May 2015.

Their presentation noted that the County is operating under structurally balanced budgets. The

financials provided indicated that the County had a surplus of approximately $33.8 million in

2013 and $8.5 million in 2014 with a reduction in unemployment from 12% in 2010 to less than

8% in 2014. These compromises were unlikely to have occurred without assurances of Court

oversight and independent conservatorship.

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 83

The Grand Bargain

Whereas San Diego and Jefferson County’s recovery plans focused on rooting out the

fraud, waste, and corruption to improve future borrowing capacity, Detroit’s plan focused on

building consensus to reduce impending financial liabilities. The plan entailed compromises

among investors, private business, nonprofit organizations, state political leaders, and labor

unions. Popularly referred to as the “Grand Bargain,” the collaborative plan entailed one-time

transfers, government loans, donations, and employee and retiree benefit cuts to restore balance.

Devitt (2014) cites Michigan Governor Rick Snyder’s important role in convincing state

legislators to borrow against the state’s annual tobacco settlement payments to the tune of $350

million. Meanwhile, a group of private donors including family foundations, such as Fisher,

Kellogg, and Ford, banded together with community-development agencies, big businesses and

the state itself. Muller (2014) notes the Governor persuaded ten large philanthropic

organizations to pledge $370 million to protect the Detroit Institute of Arts’ (DIA) prized

collection from being auctioned. In terms of the City’s art collectibles at the DIA, the City did

not include either the sale or the usage of art for collateral as part of the Plan of Adjustment.

Meanwhile, the Michigan Economic Development Corporation stepped in to fund four major

start-up businesses to offer new sources of business and occupational revenues. Overall, $800

million was raised to offset some of the pension pain and save the art.

After securing these outside resources, union representatives agreed to accept significant

decreases in pension payments to the tune of 5% to 20% annually. According to Detroit’s Eighth

Amended Plan of Adjustment (2014), $816 million dollars in the Police and Fire Retirement

System (PFRS) and the General Retirement System (GRS) defined benefit contribution systems

would be frozen from 2014 to 2034. As part of the agreement, a new two-tiered system was

placed into effect for active employees after July 1st, 2014. The GRS retirees agreed to both a

4.5% reduction in pension benefits and cost of living adjustment (COLA) elimination. While the

PFRS did not have a reduction of benefits, they agreed to a 45% reduction in future COLA

payments. The terms will remain in place for a ten-year period. Interestingly, over 70% of

retirees voted in favor of the compromise perhaps in an effort to ensure sustainability of the fund.

As part of the plan approved by the Court, the City was given the authority to borrow up

to $325 million. “Emergency Manager Kevyn Orr set aside $1.5 billion over 10 years for capital

improvements, blight removal, and equipment and technology upgrades to make the city more

livable. One third of that would be dedicated to blight removal over the next five years” (Muller,

2014, p. 13). These collaborative measures appear to be having a positive effect. Standard and

Poor’s (S&P) rated the City’s latest bond issuance favorable at A rating. S&P noted that the

State’s aid to the municipality was a huge part of consideration given by the rating agency.

RECOMMENDATIONS FOR FUTURE RESEARCH

While the debt market is certainly wary of the municipal bond market offerings with

good reason, the fiscal stress troubles found within local governments today goes beyond the risk

of debt defaults to investors. Pensioners, other creditors, and citizens are all at risk when a local

government faces a financial crisis. Given this new reality, a higher order empirical analysis of

the specific monetary sacrifices made by each stakeholder during a Chapter 9 bankruptcy filing

would be of merit. Additionally, examining the effects of large versus small government

defaults on the broader credit market would advance our understanding of the contagion effect.

84 International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016

As time passes, a more rigorous evaluation of the long-term effect of the financial recovery plans

deployed by entities examined in this paper would be of great value to the financial management

community.

CONCLUSIONS

When examining the three largest cases of public fiscal distress at the onset of the 21st

century, each event highlights the significant impact adverse economic cycles can impose on an

institution’s capacity to generate tax revenue. However, these pressures are commonplace across

many municipalities during periods of economic recession. Factors that appear to have pushed

these particular entities to the brink include high levels of institutional debt, significant deferred

maintenance obligations, and fraudulent financial management practices as presented in Table 2.

Political leadership, as well as external fiduciaries, put their own economic interest ahead of the

public good.

Several interesting findings arising from this study relate to the unique solutions deployed

by each entity. The strategies utilized by these governments are closely modeled after reform

initiatives occurring within private markets at that time. San Diego’s plan focused on internal

process improvements, such as adoption of Sarbanes-Oxley Act provisional best practices.

Consequently, San Diego was able to react quickly and avert a Chapter 9 bankruptcy filing.

Meanwhile, outside pressures limited Jefferson County and the City of Detroit’s options to

resolve the crisis internally. As such, both entities were forced to seek outside forms of support

and were driven into external oversight arrangements. While Jefferson County recovers from its

crisis using a top-down model involving a Court appointed receiver, the City of Detroit’s “Grand

Bargain” entails a more dynamic approach to a traditional Chapter 9 restructuring effort.

Table 2

Parallels across the Three Cases of Financial Distress Cities /

Counties

Economic Era Unfunded

Pensions

Deferred

Funding

Criminal

Sentence

Notable Fraud

Activity

City of San

Diego, CA

Financial Misstatements

(Enron, Worldcom, Tyco, etc.)

Yes Yes Yes Financial

Misstatements &

Corruption

City of

Detroit, MI

Great Economic Recession

Fallout (GM bailout, high

unemployment)

Yes Yes Yes Asset

Misappropriation

Jefferson

County, AL

Unregulated Complex

Financial Instrument Crash

(AIG, Lehman-Brothers, etc.)

Yes Yes Yes Kickbacks &

Corruption

International Journal of Business, Accounting, and Finance, Volume 10, Number 1, Spring 2016 85

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About the Authors:

Joshua R. Zender is an Assistant Professor of Accounting at Humboldt State University and specializes in

governmental accounting. He has worked as a municipal finance manager in California and Washington. Dr. Zender

has previously published in the Journal of Government Financial Management and Strategic Finance. He has

authored numerous program evaluation studies for several state and local agencies. He holds a Ph.D. from Auburn

University and is currently licensed as a CPA, CIA, CGMA, CGAP, CITP, and CGFM.

Keren H. Deal is a Professor of Accounting for Auburn University at Montgomery and a former accountant/budget

manager with the State of Alabama. She has published her research in journals such as the Journal of Government

Financial Management and Journal of Public Budgeting, Accounting and Financial Management and has been

asked to present on municipal bankruptcies, pensions, and fiscal stress across the United States. She is also the

Regional Vice President for the AGA Gulf Region and serves on the AGA Ethics Board and is Vice Chair of the

Journal of Government Financial Management editorial board. She is currently licensed as a CPA and CGFM.

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