October 13, 2011

News Briefs

  1. Harrisburg Goes Chapter 9, CA Law to Slow Potential Municipal Bankruptcies
  2. NACM Survey Shows Concern for Municipalities Ahead of Harrisburg Filing
  3. NACM Sends Letter of Support Ahead of Vote on 3% Withholding Repeal
  4. Ex-Im Posts Another Record Year on Increased Opportunity in Colombia, India
  5. SBA Proposes Small Business Certification Requirement


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Harrisburg Goes Chapter 9, CA Law to Slow Potential Municipal Bankruptcies

In what has potential as a late 2011/early 2012 buzz topic, one state's effort to prevent its capital city from filing Chapter 9 failed on a narrow city council vote Tuesday. Thousands of miles to the west, another state moved to toughen the process for debt-saddled municipalities to file for bankruptcy. Bruce Nathan, Esq., of Lowenstein Sandler PC and presenter of the Oct. 12 NACM teleconference on municipal bankruptcy, noted this could be just the early part of a wave of discussions nationally involving the topic.

In what has been building for months, Harrisburg, PA's city council defied the wishes of the state and its own mayor by voting 4-3 to file for Chapter 9 bankruptcy. Reports indicated a bankruptcy petition was faxed to U.S. District Court soon after. Supporters of doing so believe it gives the city leverage to renegotiate debt, largely tied to a massively unsuccessful trash incinerator project, and provides more of a fair option to local taxpayers who didn't want to take a hit disproportionate to that of investors.

Harrisburg's city council previously voted against adopting two separate debt plans, designed by the mayor and the city, respectively. Council members were resistant to ideas such as a significant property tax hike and the selling of city-owned parking garages and the incinerator operation, which was included in both plans. The failed incinerator project, sold to voters as a potential cash-generator, stands as the primary cause of Harrisburg's massive debt problems.

Pennsylvania state lawmakers had hurried this summer to pass S.B. 907, which would strip any third-level city—Harrisburg fits that distinction—of state funding if it files for bankruptcy before July 2012. State officials intimated concern that a Chapter 9 filing by Harrisburg would sully the reputation of the state capital and increase the cost of credit for the city in the future, as well as for many other similar-sized Pennsylvania cities in future borrowings.

Meanwhile, California Gov. Edmund "Jerry" Brown this week signed Assembly Bill 506 in an attempt to require municipalities in the state seeking the ability to file Chapter 9 to either declare a fiscal emergency or document efforts to negotiate with creditors prior to such a filing. However, Nathan told NACM that despite spending a lot of time on the "neutral evaluation process," said process remains unclear in the law's language. Additionally, the lack of information on the ramifications of a fiscal emergency declaration "raises questions," he added.

Though promoting it as otherwise, the move appears to be a thinly-veiled effort to pump the brakes on the emerging trend of municipalities considering Chapter 9 as an increasingly viable option to beat financial woes. Brown said the legislation "puts in place reasonable steps for local governments to take before filing bankruptcy...let's be clear, this bill does not prevent a municipality from declaring bankruptcy or even throw roadblocks in its path." The goal was to find "alternative, less drastic solutions" than filing.

The municipal bankruptcy issue has become an increasingly hot one for businesses and creditors that do significant selling on terms to municipalities, especially ones now struggling amid the ongoing financial crisis and increasing entitlement issues. This year, at least a half-dozen municipalities filed for protection under Chapter 9. Jefferson County, AL narrowly avoided it in recent weeks thanks to a $1 billion renegotiation approved by debt holders tied to a sewer rehab project. Those owed debts from Harrisburg, PA haven't been so flexible.

Nathan said municipal bankruptcy could become a growing problem for creditors. He listed skyrocketing health care and pension obligations as well as lower revenue and construction-related debts both tied to the ongoing economic downturn among top reasons for the growing trend. He noted that specifically in California, the state capital of Sacramento alone has unfunded retiree health care liabilities of $245.6 million, and that the bankruptcy filing in the city of Vallejo was among the largest in U.S. history. Nathan also noted that credit ratings for municipalities that file for Chapter 9 are likely to take a significant hit, though it's "not necessarily a death knell," as demonstrated in the eventual restoration of the rating held by Orange County, CA after its past filing.

To purchase and listen to a replay of Nathan's teleconference, "Unlocking Chapter 9 and the Mysteries of Municipality Chapter 9 Bankruptcy Cases," click here.

Brian Shappell, NACM staff writer

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NACM Survey Shows Concern for Municipalities Ahead of Harrisburg Filing

Even before Harrisburg's bankruptcy filing, detailed in the story above, concern over municipal bankruptcies had become increasingly widespread among the nation's credit professionals. NACM's September survey showed that while most creditor companies are only mildly concerned with the possibility of major bankruptcies like the one in Harrisburg, many of them expect the trend to worsen before it improves.

When asked how concerned they were about the potential for bankruptcy filings or reorganizations by municipalities in the coming months, 56% of survey respondents said they were at least "somewhat concerned," while 21% were "very concerned." Another 12% were "indifferent" to the risk, and 11% weren't concerned at all, considering themselves largely insulated from the effects of any potential municipality bankruptcy filing, in Pennsylvania or otherwise.

Among those participants who were indifferent or not concerned at all, the chief reason for their answer was a lack of exposure to struggling municipalities and governments. "We don't have sales to municipalities," they said, although others noted that while the risk of bankruptcy wouldn't affect their companies, the threat of a rash of government reorganizations was still troubling. "It won't affect our business, [but] personally, it bothers me very much," said one respondent.

Still, even among credit professionals whose companies don't have that much skin in the municipality game, concern about the ripple effect that these bankruptcies would have on cash flow was extremely prevalent. "We do not do a lot of business with government entities. However, some of our customers do, which may make collection even tougher than it already is," said one respondent. "We do not do business with municipalities, so from that perspective there wouldn't be any impact. However, we do make investments with our excess cash and often buy municipal bonds," said another. "Obviously it will make it difficult to make investments in these bonds if bankruptcy becomes the means for municipalities to deal with their financial issues."

Logically, respondents whose companies did business with municipalities seemed much more likely to be "very concerned" about the prospect of these entities filing bankruptcy. "My organization has historically not required credit applications or financial information for any municipality or community organization," said one respondent. "This is a major concern and I have had meetings to discuss a change in that procedure for this very reason."

Many cautioned that the trend will worsen as municipalities continue to struggle through an anemic economic recovery. "As a concrete supplier, we have recently experienced problems of slow payment by a number of municipalities. We expect this trend to get worse," said one participant. "The list will get longer. With the added pressures of unemployment insurance and lower tax revenues, I believe the [federal] government will need to step in and intervene," said another.

NACM's October monthly survey is now live and asks about your upcoming concerns for 2012. All respondents receive .1 CEUs for their participation, and are automatically entered into a drawing for a free teleconference registration.

Jacob Barron, CICP, NACM staff writer

FCIB's 22nd Annual Global Conference

November 13-15, 2011
The Ritz-Carlton, Palm Beach

You Asked. We Listened.

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View full program here.

Hotel deadline is October 20, 2011. Click here for further information.

NACM Sends Letter of Support Ahead of Vote on 3% Withholding Repeal

NACM issued a letter this week in support of H.R. 674, a bill that would repeal a potentially onerous 3% withholding requirement on all government contracts. The letter, addressed to House Ways and Means Committee Chairman Dave Camp (R-MI) and Committee Ranking Member Sander Levin (D-MI), was drafted ahead of a vote on the legislation scheduled for the week of Oct. 24.

Markup of the bill will take place today in Camp and Levin's committee. Following its approval, the legislation will go to a full vote in the House, where it enjoys widespread bipartisan support; more than half of all representatives have signed on to the bill as cosponsors.

Originally introduced by Rep. Wally Herger (R-CA), H.R. 674 would do away with the 3% withholding tax, which was originally enacted as part of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. When signed into law, the tax was scheduled to go into effect at the beginning of this year. However, it was delayed to 2012 by the American Recovery and Reinvestment Act of 2009, and then delayed again this year by the Internal Revenue Service (IRS) until 2013.

The goal of the provision was to address the nation's tax gap, which refers to the annual $345 billion in taxes that are legally owed, but go uncollected. However, the 3% withholding tax would be levied on all government contractors, even ones that fastidiously comply with the nation's tax laws, ultimately forcing all contractors to pay for the sins of a few. Should it ever go into effect, the 3% tax would also do severe damage to many companies' cash flows, falling heaviest on the nation's smaller firms and other companies that can least afford it.

"Many small businesses that contract with the government operate on very slim profit margins, so a 3% tax will create serious cash flow problems for them at a time when so many are struggling," said Herger. "Repealing the 3% withholding provision will provide a significant benefit to small businesses just by getting Washington out of their way. If we don't repeal it, we will put small businesses, jobs across America and our efforts at economic recovery at greater risk. It's time we took this harmful, job-killing provision off the books forever."

NACM has opposed the 3% withholding requirement since its introduction and hopes that Congress finally repeals this fundamentally unfair and potentially harmful provision.

For more information on NACM's fight to repeal the 3% withholding tax, click here.

Jacob Barron, CICP, NACM staff writer

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Ex-Im Posts Another Record Year on Increased Opportunity in Colombia, India

Though the Export-Import Bank of the United States (Ex-Im) broke records for its export financing in 2010,  and did so by a sound margin, Ex-Im President Fred Hochberg stressed last year that "there remains enormous untapped potential for more American companies to sell more goods and services to more customers in more countries." The official 2011 numbers, to be released today, will show that Hochberg was far from overselling in his statement.

Hochberg was scheduled to unveil statistics from Ex-Im that find the organization authorized more than $30 billion in export financing in FY2011 (Oct. 1, 2010-Sept. 30, 2011), which supported more than $40 billion worth of exports and more than 300,000 jobs. It was well above the previous $24.5 billion record in 2010 export financing. Ex-Im noted 2010's authorizations supported $34.4 billion worth of exports and 227,000 American jobs at more 3,300 U.S. companies. This year was also the first full fiscal year for the use of a pair of new products, including a supply chain financing program geared exclusively toward small businesses.

Ex-Im's activity in 2011 was highest in Mexico and India, which is gaining ground quickly thanks in part to massive needs in the energy sector, said Ex-Im sources. Colombia has also made strides as the biggest gainer in 2011. Other nations offering what Ex-Im considers high-opportunity going forward include Turkey, Vietnam, Indonesia, Brazil, Nigeria and South Africa. During an NACM interview with Hochberg in September, he said, "If you're not exporting to places like these, you need to get in that game...there's not a company that exports that isn't doing well."

Ex-Im Vice President for Public Affairs Phil Cogan told NACM a key reason for opportunities for U.S.-based companies in those nine locations is infrastructure needs. "Roads, bridges, airports and electrical generation are at the center of their needs—and their needs are enormous," Cogan noted. "American companies are among the leaders in the world with providing infrastructure services and equipment."

Conspicuous in their absence from this list are high-growth economies China and Russia. This should not be a surprise, said Cogan, as Ex-Im's project-financing resources are not as needed by nations with "cash to spend." China's long-running hot growth and Russia's benefitting from high oil prices have placed both firmly in such a category.

For the official, specific statistics on Ex-Im's FY2011 performance, check NACM's blog late Thursday afternoon.

Brian Shappell, NACM staff writer

NACM's Mechanic's Lien and Bond Services (MLBS): Best-in-Class Service for Today's Construction Credit Professional

MLBS' newly redesigned Lien Navigator is a web-based service that provides up-to-date information for all 50 states and Canada, including notice, lien, payment bond and suit timelines, procedures and other relevant information in a state-by-state/province-by-province format.

MLBS also offers two preliminary notice to owner (NTO) services, deadline tracking, a lien and bond filing program and a suit against bond and foreclosure service. Both NTO services include, at no additional charge, a Next Action Notification Email. These reminders are sent automatically to ensure that your lien and suit deadlines are met during each step of the lien process.

For more information on NACM's MLBS, click here.

Don't miss Greg Powelson's half day workshop on November 10th
in Birmingham, Alabama. Click here for details.

SBA Proposes Small Business Certification Requirement

Small businesses looking to land contracts with the federal government may have to certify their size in order to do so. That's if a new proposal from the Small Business Administration (SBA) released last week goes into effect, as officials take aim at improperly awarded small business contracts that end up benefiting larger firms.

The Small Business Jobs Act, enacted last year, included provisions that required SBA to amend its regulations pertaining to small business size and status integrity. Under the proposal, an authorized company official would have to certify that their business qualifies as a "small" business. Failure to update their company's size or status in the Online Representations and Certifications Application (ORCA) database at least annually would result in the company no longer being identified in the database as small, and therefore render them ineligible for the 23% of federal contracting dollars statutorily earmarked for smaller firms.

The proposal is currently open for public comment until Nov. 7. NACM plans to weigh in on the provisions later this month.

Misrepresentations in small business contracting have been the object of criticism for many years. In many instances, so-called "small businesses" are owned by larger conglomerates, allowing massive companies like Lockheed Martin and General Electric to use smaller businesses as a front in order to acquire contracting dollars that should be going to actual small firms operating independently.

Tackling the alleged billions of small business contracting funds that end up going to large companies has been difficult legislatively, but discontent among members of Congress is fairly common. "Improving contracting and subcontracting for small businesses is a complex balancing act," said Rep. Mick Mulvaney (R-SC), chairman of the House Small Business Committee's Subcommittee on Contracting and Workforce, at a recent hearing on contracting challenges. "We must eliminate bad actors such as small businesses that are simply fronting for a large business, while at the same time ensuring that small companies are not burdened with more costly compliance rules that also waste taxpayer dollars."

"Small business contractors and subcontractors save taxpayer dollars, increase competition, increase innovation and create jobs. Improving the contracting process, without further burdening small firms, will only help improve each of the areas and move our economy in the right direction," he added.

Stay tuned to NACM's blog and NACM's eNews for further updates.

Jacob Barron, CICP, NACM staff writer

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