Chapter 9 Bankruptcy: A primer for the Citizens of Bay St Louis

The notion that the City of Bay St Louis was experiencing financial problems is not by any means new. Just over a year ago the citizenry heard lots on the topic during the municipal election with Mayor Fillingame unequivocally proclaiming the City was in good shape financially. The irony is by that time, the City was already using its trade vendors as its financier. You see folks, when the bills don’t get paid the trade vendors become an unofficial bank. Even worse, it is the kind of unofficial bank that must make forced loans that bear no interest. It was a sign of things to come in a fools game where the passage of time is the ultimate enemy.

The warning signs were literally everywhere and yet for month after precious month the City Council did nothing. Worse, it appears certain members of the Council were simply going along with the Mayor because it was easy. Last October the City Council, at the request of the administration, finally took action on utility rates to fix the problems the administration identified in the Water and Sewer operations. The increase was targeted at high volume water users which it turns out was the very segment of the City’s customer base that was in decline. Now the Administration claims the rate increase was insufficient.

Last January Slabbed published a detailed analysis of the irresponsible budget practices that lay at the heart of the City’s financial decline. Since then the City has spent money it was legally required to set aside for debt service on municipal operations. Broke, the city made a loan with a local bank that it lacked statutory authority to make.  The proceeds of that loan, mistakenly called “a line of credit” by the Mayor and Council, was split between the water and sewer fund and the general fund. Despite being at every meeting the City Attorney was evidently checked out MIA allowing the Mayor and City Council to step out making what Councilman Lonnie Falgout now terms an illegal loan. I fear it’s gonna take the elected officials here to have to pay big dollars out of their own pockets before they’ll learn the value of operating within the law.

Unable to make the scheduled debt payment on Water and Sewer debt due in July 2014, the City Council again kicked the can, refinancing debt dating from the 1990s that had already previously been refinanced.  The City, caught in a downward financial spiral incurred hundreds of thousands of dollars of debt issuance costs that could have been used to pay for City operations.  From a financial management standpoint, the performance of the City’s elected officials really can’t be much worse.

The last City Council meeting drove home the misplaced priorities folks when the council spent over a half hour planning how to place banners early for Harbor Fest, saving disclosure of the fact the City’s auditors were considering issuing a going concern opinion for the last hour of what turned into a four and a half hour meeting.  Now we have a special meeting on tap for the Thursday of this week to tackle what should have been the most pressing business of the last meeting.  I wonder in advance how the agenda will be constructed by Council President McDonald and the Mayor to torpedo any meaningful conversation.  Planting rumors with the library folks worked like a charm last meeting as over an hour was spent explaining why the citizens of Bay St Louis should not be paying twice for the same service. What’s a few more weeks on the road to bankruptcy?

Now some lovely music.

When I met Councilman Falgout for the first time I told him I held no envy for the job he has as a City Councilman. Once, long ago sitting in an executive session of a school board far away, the School Board President, referring to the Superintendent who was not in attendance, told me they were at his mercy and they were depending on me as the District’s auditor to shoot straight with them on the District’s finances, which indeed turned out to be very shaky. Whether it is a City Council or School Board, the Board is only as good as the information the Chief Executive furnishes them. And when the Chief Executive is a spendthrift, problems will follow. At the end of the day though, it does not absolve the Board of their duty to provide oversight.

I mention this because while it is good the City is finally addressing the financial structure of the water and sewer fund, what the City needs is a comprehensive discussion of the entirety of the City’s financial operations. Simply put, the financial problems in the Water and Sewer fund do not exist in isolation. If I may be so bold as to suggest that the City Council consider doing additional consulting with its auditing firm along those lines. It would absolutely be money well spent in my opinion.

There is something else happening that those of you at home are just beginning to see in the multiple media outlets examining the City of Bay St Louis and its operations. We’ve always had the Echo. Obviously there is Slabbed New Media but we are now also seeing the Sun Herald devote significant resources to the City beat. This is a good thing because sunshine is a good thing, the more the better in fact. I look forward to seeing the work Jennifer and Justin are putting in translate to even more substantive stories as I hear there are some in the pipeline.

Finally, it is not a foregone conclusion that the City will file for bankruptcy under Chapter 9 of the U.S. Bankruptcy code. Should the City Council take a detailed look at both the revenue and expense sides of the equation and make some hard decisions the current financial crisis can be solved.  I’ve seen enough of the City’s financial operations to know that blindly raising taxes or water rates is not the answer. This fiscal year, the City balanced its original budget using fantasy revenues it would never collect.  The City’s cost structure must be right sized to what it actually generates through property and sales taxes along with the utilities.

However, should a bankruptcy come to pass, this is where I know I’ll have some fun as the nice employees on 2 are a hoot!:

Intervention/Right of Others to be Heard

When cities or counties file for relief under chapter 9, there may be a great deal of interest in the case from entities wanting to appear and be heard. The Bankruptcy Rules provide that “[t]he Secretary of the Treasury of the United States may, or if requested by the court shall, intervene in a chapter 9 case.” Fed. R. Bankr. P. 2018(c). Further, “[r]epresentatives of the state in which the debtor is located may intervene in a chapter 9 case.” Id. In addition, the Bankruptcy Code permits the Securities and Exchange Commission to appear and be heard on any issue and gives parties in interest the right to appear and be heard on any issue in a case. 11 U.S.C. §§ 901(a), 1109. Parties in interest include municipal employees, local residents, non-resident owners of real property, special tax payers, securities firms, and local banks.

22 thoughts on “Chapter 9 Bankruptcy: A primer for the Citizens of Bay St Louis”

  1. Is the PSL North America LLC pipe mill one of the Water and Sewer operations high volume water users?

    Because if so,PSL North America LLC just filed Chapter 1. Hopefully there isn’t an additional negative impact on the BSL finances from this.

    With about 70 employees, PSL North America says it’s $130 million in debt and can’t borrow the money it needs to buy steel to make more pipe. PSL North America says it lost $30 million after steel it bought couldn’t withstand required pressures. Ouch. Wonder where that pipe was manufactured?

    Tags: chinapiperupture
    That pipe reportedly had dimensions diameter about 18 inches, wall thickness about 1.75 inches, and contained high pressure steam when it ruptured, killing three. P91 failure in China – 3 fatalities

    1. Not from PSL. The higher volume users include the Hospital and Casino. Both are facing their own financial challenges. The Hollywood hurts in two ways as revenues from the gaming tax are also down.

  2. Great post, Doug. I don’t know what more can be said to this Council. They are going to have to step up and take control of the finances. Now that it is documented that the Mayor and City Clerk have lied not only to the public, but to the Council as well continuing to insist that all is well, the word that needs to be foremost in the minds of the Council when talking to the Mayor and Clerk is: VERIFY, VERIFY, VERIFY
    As long as they are able to live off of their vendors and make payroll, they can put their best foot forward and no one knows any better—that is until that fateful day when they can’t make payroll. No one knows or cares and it can be kept secret if John Q Publilc doesn’t get paid for the merchandise he sold them or for services rendered, but let the first Public Works employee not get paid–then fit is gonna hit the shan. It’s just a matter of time.

    1. When Jennifer Lenain asked that question a different way the answer was half her annual pay, $22,500 if memory serves.

  3. City employees also complain about the Mayor’s daughter having “privileged” hours shall we say, leaves whenever she wants while others have set hours. From what I hear it is a real burden working with the boss’s daughter or as some have nicknamed her–“Daddy said.” There doens’t appear to be as much allegiance to the administration as they like to think there is.

  4. Doug,
    Today at 5:30pm the Bay St. Louis City Council will continue their recessed meeting of last week to decide whether or not to raise the utility rates on their users again in just six months. However, it is important for the Bay residents to know a few things that the Council should consider before this vote, if I may:
    Eveyone needs to know that this increase in rates is not about having cleaner, better water or improved services.
    This is about the Mayor and City Clerk mismanaging Soid Waste Funds (garbage collection) and putting the City in arrears with this agency to the point that Solid Waste could not pay their docket, and the citizens of Bay St. Louis are now paying for a $500,000 loan to the First Bank to pay these delinquent bills to Solid Waste and all the additional costs that go with this and restruturing their debt.
    This burden is only on the users in Wards 1,2,3 and 4. Wards 5 and 6 did not move to city utilities when annexed. They continue to receive utility services from the County.
    This rate increase, if passed, will be around $9 to $10 increase in each bill in addition to the increase of 6 months ago.
    So, every user will see the same increase. For example, Hollywood Casino will pay the same increase as a single mother with 3 or 4 children to care for by herself. Is this equitable?
    But, most importantly, and aside from debating what the increase will be, everyone needs to know why this happened.
    It happened because the Administration through its Utility Dept. did not send Solid Waste their payments that were included in each user’s bill when they paid it each month. It is a simple procedure. Waveland simply sends Solid Waste their user fee times the number of users each month. Diamondhead has their citizens pay Solid Waste directly. The problem area is Bay St. Louis City Hall and the Utility Dept.
    Also, Wards 5 and 6 Solid Waste payments are handled through Jimmie Ladner, Hancock County Tax Collector, who for some reason also does not send the payments directly to Solid Waste, but sends them instead to the Bay St. Louis Administration and Utility Office. Big mistake.
    I am told there is some kind of an “agreement” for doing it this way.
    The users need to investigate this “agreement” since the Mayor of Bay St. Louis is the Chairman of the Solid Waste Board, and Ward 4 Councilman Compretta is also a member.
    This so-called agreement is causing the money to become bogged down in the Bay St. Louis City Hall while Solid Waste officials wait for their money, and the citizens of Bay St. Louis write their checks thinking their bill has been paid, and are now paying for a half million dollar loan because their bills were not being paid.
    THIS AGREEMENT HAS TO GO BECAUSE IT DOESN’T AGREE WITH LOGICAL THINKING AND ETHICAL STANDARDS. AND MOST IMPORTANTLY IS NOT BENEFICIAL TO EITHER THE CITIZENS OF BAY ST. LOUIS OR THE SOLID WASTE AGENCY.
    This should be the first order of business discussed tonight before any rate increase is even considered.
    Hopefully a citizen or Councilman will bring it up.
    Continuing to do business this way is like putting a band aid on severed limb.

    1. Excellent points.

      On the $500,000 loan you reference, the proceeds were split with $150,000 going to the general fund (which part the administration pretended was a tax anticipation loan) and $350,000 went to Water and Sewer. The $150,000 portion has been paid back leaving only the $350,000 balance due to The First. Based upon what I heard last meeting, the Administration does not have any sort of well conceived plan to pay it off as billings have fallen short of the Administration’s projection.

      There is part of Ward 5 that was in the old city limits.

    2. >>This so-called agreement is causing the money to become bogged down in the Bay St. Louis City Hall while Solid Waste officials wait for their money, <<

      That's a charitable way to put it. Makes it sound like the money is there, just slow to be passed on to the correct recipients. I don't believe these collections are still undiverted and on deposit somewhere awaiting rescue.

      This agreement needs to be exposed and examined.

  5. Councilman of Ward 1 is defecting back to the mayors camp. He wants a special meeting to rescind his vote against the rate increase without further investigation into the questions of mismanagement or improprieties. Maybe he has realized he may be part of the problem, again maybe according to face book his wife decided! Who elected her? Or maybe other personal gains!

  6. I have not seen them, but everyone is talking about Mrs. Seal’s Facebook revelations. What a stupid and unprofessional way to air your dirty laundry, and wonder what the Hancock Bank thinks of it. She is employed with Hancock, the bank that holds the bonds on the city’s utility debt. This is all getting so mangled financially and politically. Could Councilman Seal have a conflict of interest here? Voting on a piece of business with a corporation where his wife is employed? And the wife shows up at the meeting to witness the vote, is visibly unhappy with her husband’s vote, and posts it on Facebook?!!
    All the Council was asking was more time to review the numbers that the Mayor and City Clerk had given them. They weren’t declaring that they were ruling out a procedure for making sure the bank got their money. And, by the way, raising rates on the utility users through a surcharge on their utility bills won’t in any way guarantee that the funds will be set aside for the bank to receive this time next year.
    Ask the Solid Waste office manager why the payments sent to the Bay’s utility office for garbage pick up never made it to Solid Waste. Maybe the Hancock Bank should talk to them. Part of the motion to adopt whatever plan (a surcharge on the utility bills, or cuts in the budget in personnel or whatever) is arrived at for setting this money aside for July 1, 2015 should be:
    The Council should pass a motion that the monies collected through the surcharge on the utility bills be deposited in a special account with no authorization for anyone to make withdrawals from it, and the Mayor, City Clerk, and Utility Office Manager have to appear once a month at the Council meeting to give a report on the balance of the account with copies for the Council to keep throughout the year until July 1, 2015. These are measures you have to take with devious, deceitful people who are handling public funds.
    Nothing will change in the Bay’s financial problems until there are changes at the top in the administration, and the Council is going to have to force the issue here. You don’t kill a snake by chopping of its tail–you have to get to the head.

  7. I have not seen them, but everyone is talking about Mrs. Seal’s Facebook revelations. What a stupid and unprofessional way to air your dirty laundry, and wonder what the Hancock Bank thinks of it. She is employed with Hancock, the bank that holds the bonds on the city’s utility debt. This is all getting so mangled financially and politically. Could Councilman Seal have a conflict of interest here? Voting on a piece of business with a corporation where his wife is employed?

    Good point, Haddanuff. Under Louisiana’s ethics code, an elected official with such a conflict need at least state it for the record; if you are an appointee or employee, unless the conflict foes away, you relinquish your job.

    Not only that, a bondholder/trustee at least need maintain the appearance of impropriety. Bondbuyers get a tad bit upset finding out there’s something more than arms-length transactions involved between an issuer and trustee.

    1. Its really worse than that. Doug voted his conscience and caught some flak for it, evidently including from his wife according to rumor. I’m not much on wouldda couldda shoudda thing.

      That said there was a level of intellectual dishonesty at last week’s meeting that needs to be addressed in detail. For now I’ll say that a typical bond trustee is not into micromanaging the business affairs of their debtors. They should care about one thing and one thing only in being paid, how the debtor accomplishes that is typically not within their purview absent a default.

      Hizzoner has painted himself into a corner on taxes so he shifts general fund obligations to the Enterprise Fund. Funny thing is for all the yammering City Clerk Kolf has done about the purpose of the Enterprise fund, which I do not agree with as it has no basis in Governmental GAAP, he fails to disclose that it is illegal for the Enterprise Fund to subsidize General Government and that is exactly what the Enterprise Fund is doing funding General Fund Salaries.

      There was a point last week where Mayor Fillingame again mistook himself for the Fairy Godmother waving a magic wand when he was explaining his rationale for charging the grapple truck driver to the Water and Sewer fund. It is troubling that after leading the City Council into this predicament, three members still accept the Mayor’s fairy godmother like explanations as being anywhere near acceptable.

  8. Doug,
    It is not a rumor that his wife is upset with him. Her Facebook page is beyond the pale for someone in her position at the Hancock Bank. Maybe Hancock Bank needs to review thier social media policy as well. She is critical of the Bay St. Louis City Council’s execution of business, and asks anyone who will to “slap her” if she ever says she wants to go to another meeting of the Council. What? A body guard if she attends again? For what?
    The Council President did try to schedule a special meeting last Friday upon request of Counciman Seal, but as of Saturday morning, the city Attorney has stated that he has advised Council Pres. McDonald not to call a special meeting.
    Go to the Ethics Laws for the state. Councilman Seal, now in his 3rd term, and having served as Council Pres. numerous times, should have know he had a possible conflict. I am sure he was well intentioned on Thurs. evening, but what has happened since then?

  9. Doug,
    P.S.
    Your Fairy Godmother analogy of Fillingame is right on. He even managed to disappear like her Thursday evening. We have to try to maintain our sense of humor in this ’cause it is so depressing.
    Also, I was really embarrassed for Councilman Compretta trying to make the motion to pass the rate hike. He didn’t even know how to word it revealling the fact that they ALL need more time to study the issue and what approach they will take. But, as you say, 3 of them just imitate “Sleepy” one of the 7 dwarfs, and wake up long enough to vote however the Mayor wants.

  10. Interesting article
    Good information for the voters and property owners
    One thing I noticed is the major complainers do not use their real names in their posts
    Sad that grownups hide

        1. Yeah, in a way. Helps cut down on social retaliation and encourages those with a higher level of knowledge of a particular topic to share. Most newspapers phased out anonymous commenting because policing the trolling (and where you draw that line on that) consumed scare time.

          Slabbed has done remarkably well with the commenting community policing itself by and large. The ideas are what is important more so than the messenger.

          I saw Councilman Falgout put this old post out on Facebook. At the time it was written, when everyone was less than one year into their term of office, the City was very close to the point of no return financially. They’ve been digging out ever since.

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