Municipal Bonds in Bankruptcy§902(2) and the Proper Scope of“Special Revenues” in Chapter 9

Table of ContentsI. Introduction 956II. Laying Out the Problem: the Muddled Treatment of Bonds in Bankruptcy 962A. The Mechanics of the Bond Market Pre-Bankruptcy 9631. General Obligation Bonds 9632. Bonds 9683. Short-Term Debt Securities 9714. Securing Bonds with Statutory Liens 9725. Summarizing Pre-Bankruptcy Expectations 975B. Reversing Expectations: The Mechanics of theBond Market Post-Bankruptcy 9761. Impairing Contractual Rights 9772. Impairing Property Rights 9803. Lien Survival and the 1988 Amendments 986a. Contractual Lien Survival and the § 552(a) Problem 987b. Continued Bondholder Payments and the Automatic Stay Problem 989c. Limiting Bondholder Recourse to Other Municipal Assets 9934. Summarizing the Treatment of Bonds in Bankruptcy 995III. Getting Through the Doorway: Qualifying as Revenue 997A. The Breadth of the Doorway: The FiveCategories of Special 9971. Non-Tax Receivables 9972. Tax Streams 10023. Summarizing the Types of Municipal Financing that § 902(2) Captures 1007B. Opening the Doorway to § 902(2)(E): In reHeffernan 10091. The Opinion 10092. The Collier Explanation 10113. Assessing Heffernan: Do Tax Transfer Payments Fit Within § 902(2)(E)? 1013IV. Broadening the Doorway: Redefining Special Revenues 1015A. Redesigning § 902(2) 1017B. Legislative Revision to Chapter 9 1023C. Judicial and Market Revision of Chapter 9 1026V. Conclusion 1031I. IntroductionIn July of 2011, the city of Central Falls, Rhode Island, was on a path towards municipal bankruptcy.1 It carried a structural budget deficit of approximately $6 million per year and had no cash on hand to pay the $80 million in pension and health insurance benefits it owed to its retired police officers and firefighters.2 Its principal creditors included pensioners, municipal employees, and general obligation (GO) bondholders.3In Providence, state legislators were concerned about the economic consequences that might follow if the city made the politically popular choice: filing for bankruptcy, then cutting bondholder repayments (as opposed to current and former employee benefits).4 In an attempt to lure investors to bonds that will be sold by other Rhode Island municipalities, the General Assembly passed a law guaranteeing that Central Fall's bondholders would be repaid in full in the event of a municipal bankruptcy-a contingency that occurred when the city filed its petition two weeks later.5Ultimately, the plan worked.6 After a year in bankruptcy, a federal judge approved Central Falls' reorganization plan, which repaid GO bondholders in full while slashing some pensions by up to fifty-five percent. …