John Filan was extensively quoted in a May 24 article for Deal Flow Media’s Distressed Debt Report on public sector restructuring. Commenting on the financial problems and challenges facing governmental entities and the need for public sector restructuring, Filan observes:
“I think most governments will go through some amount of financial restructuring,” Filan said. “It would take an exceptional government entity to not have to go through some kind of changes organizationally or to not have a reduction of spending.” Filan said he expects to see governments seek restructurings but for very few to consider Chapter 9 bankruptcy. “I don’t think you’ll see much, as far as Chapter 9 filings are concerned,” he said. “It’s very unlike Chapter 11. It’s not very well defined by the court, and it’s not advantageous to do. It’s a very long and expensive process as Vallejo has learned.” The city of Vallejo, Calif., filed for a Chapter 9 bankruptcy in May 2008, which is still pending. Filan said that state and local governments have been so decimated by declining property values and high unemployment that it may take several years for property tax and income tax revenues to return to sufficient levels for sound operation.
Filan is also of the view that the severity of the problem is deep and likely to be long-lasting:
“We’ve had 11 recessions since 1948, but none has been this deep and taken so long to recover,” Filan said. “This has been a very deep recession with deep, protracted unemployment and declines in real estate values. The challenge for local governments will be the depth and duration of high unemployment and depressed housing values. “In Florida, some homes have been assessed down 50 to 60% since 2008,” he said. “If your property tax revenues are cut in half, you’re in trouble. Housing has not been a part of the recovery. Real estate prices are not rising and new construction is not happening. Employment and property values are the two things that drive government revenues with income taxes and property taxes.” Filan said that one of the problems that will delay a recovery of property tax revenues is a “lag effect” in property tax valuations that can delay for up to three years the time from when an assessment is calculated to when collection is made based on that assessment.
The article, “Public Sector Restructuring to Grow With Declining Government Revenue” by Kirk O’Neil, is available to subscribers of the Distressed Debt Report.