Rocky mountain economic presentation

Rocky Mountain Economic Summit Natalie Cohen Head of Municipal Research natalie.cohen@wellsfargo.com 212-214-8014

July 11, 2014 Please see the disclosure appendix of this publication for certification and disclosure information

Current Themes in the Municipal Securities Market 

Supply/demand factors continue to trump credit.



Investor hat switch from H2 2013 to H1 2014: from the expectation of higher rates – to persistent low rates; add reinvestment proceeds, global inflows, the search for yield and spreads compressed.



State/local revenues are improved; some positions that were cut are being added back, particularly at the local school level. But consider:  The “pull forward” of earnings and income at the end of 2012 in advance of higher tax rates in 2013; as a result, Q1 2014 revenues are down 7% from Q1 2013 according to Rockefeller Institute.  High income tax and capital gains states did well in 2013 – such as California  These events are driven by tax policy – and require careful budget forecasting – some places had YoY gains but budget deficits -- such as New Jersey and even Puerto Rico



We may gain some clarity on treatment of bonds in bankruptcy in H2 – Particularly important is the treatment of retiree benefits vs. debt repayment.



Ratings volatility likely to continue – frequently due to criteria changes and not credit



Other headwinds:  Public pension underfunding crowding out other services in some places – a key reason for low volume for infrastructure despite low rates  We see the $1 trillion student loan debt dampening first-time homebuyer demand  Pre-election year politics create policy uncertainty and make planning difficult – e.g.

Highway Trust Fund re-authorization

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1

The Shape of Municipal Bond Volume 2001-2008 Resembles the Housing Boom and was Propelled by Low Rates • Volume jump in 2012 was largely due to an increase in refundings and mirrors 10-years ago (10-year call) • Going forward: volume is likely to return to pre-2001 levels • Volume would have been lower in 2009-2010 if not for the Build America Bond program New Issue Volume (1980-2014) and the Percentage of Bond Insurance $500

60% New Issue Bond Volume Refunding Bond Volume

$400 $350

40%

Percentage

$300 30%

$250 $200

20%

Dollars (in Billions)

50%

$450

$150 $100

10%

$50 0%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

$0

Year As of June 30, 2014 Source: Bond Buyer, Assured Guaranty, Thomson Reuters and Wells Fargo Securities, LLC

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2

Issuance in 2014 is down; “new issue� volume is identical to H1 2013; the difference is the drop in refunding activity

Long Term Bond Volume, 2011-2014

Month

Amount

June

$ 39,555

July

35,219

August

38,713

September

17,242

Source: As of 6/15/14; Bloomberg, Wells Fargo Securities, LLC

$50 $45

2011 2012 2013

$40

2014

$35

Dollars (in Billions)

Maturities, JuneSeptember, 2014 ($millions)

$30 $25

$20 $15

$10 $5 $0

Month As of June 30, 2014 Source: Bond Buyer and Wells Fargo Securities, LLC

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3

Fund Flows – It’s All Relative

• April 2011 U.S. rating on negative watch S&P; August downgrade = Treasury rally/equity sell-off • Fiscal Cliff drama in December 2012 – once resolved the equity markets took off

$50,000

Monthly Net New Mutual Fund Cash Flows by Broad Asset Class (January, 2010 - Present)

$40,000 $30,000

Dollars (in millions)

$20,000 $10,000 $0 ($10,000) US rating on watch for downgrade ; debt ceiling debate

($20,000) ($30,000)

Equity Taxable Bond Tax-exempt Bond

($40,000)

Fiscal Cliff debate and resolution “Taper Tantrum” followed by tightening

($50,000)

Through 5/31/14; May values are based on weekly estimates.

Source: Investment Company Institute and Wells Fargo Securities, LLC

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Fund Flows, Fixed Income Only Monthly Net New Cash Flows by Select Fixed Income Class (January, 2013 - Present) $25,000 Tax-exempt Bond $20,000

Investment Grade Bond High Yield Bond

$15,000

Govt Bond World Bond

Dollars (in millions)

$10,000 $5,000 $0 ($5,000) ($10,000) ($15,000) ($20,000) ($25,000) ($30,000)

As of April, 2014 Source: Investment Company Institute and Wells Fargo Securities, LLC

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5

Global Market Influences, continued In 2013, note mid-year shift in municipal holdings from sell-off to increase – opposite the flow in U.S. preand post “taper tantrum” US Long Term Securities Held by Foreign Residents

Millions of dollars Date

11-Dec

Total

$

Treasury

Agency

Corporate Debt*

$

2,567,266

Equity

$

3,841,901

Municipal Debt*

11,861,747

$ 4,356,681

$ 1,046,310

12-Jan

12,176,623

4,449,925

1,034,692

2,582,362

4,048,988

$

49,589 60,656

12-Feb

12,459,556

4,470,555

1,057,924

2,635,977

4,232,863

62,237

12-Mar

12,591,085

4,510,887

1,046,544

2,612,512

4,355,167

65,975

12-Apr

12,580,150

4,594,212

1,016,647

2,585,582

4,319,192

64,517

12-May

12,337,866

4,635,590

1,013,230

2,561,184

4,061,913

65,949

12-Jun

12,556,061

4,680,774

1,001,461

2,547,386

4,261,853

64,587

12-Jul

12,603,754

4,760,456

995,529

2,562,344

4,217,611

67,814

12-Aug

12,794,650

4,788,103

1,000,765

2,611,841

4,327,284

66,657

12-Sep

12,988,063

4,793,665

1,014,427

2,639,003

4,473,987

66,981

12-Oct

13,000,466

4,854,545

1,001,445

2,666,375

4,414,839

63,262

12-Nov

13,092,218

4,861,617

997,488

2,681,004

4,488,645

63,464

12-Dec

13,218,220

4,909,828

979,363

2,698,924

4,567,524

62,581

13-Jan

13,454,571

4,947,523

950,494

2,708,359

4,786,098

62,097

13-Feb

13,537,051

5,000,614

929,262

2,708,596

4,836,918

61,661

13-Mar

13,732,531

5,001,076

935,588

2,718,730

5,015,813

61,324

13-Apr

13,903,736

5,003,227

941,108

2,774,661

5,121,904

62,836

13-May

13,945,624

4,990,606

910,993

2,753,814

5,229,893

60,318

13-Jun

13,672,483

4,920,352

880,889

2,686,413

5,128,262

56,567

13-Jul

13,949,907

4,939,525

899,710

2,732,788

5,322,031

55,853

13-Aug

13,825,635

4,925,215

893,318

2,726,295

5,223,624

57,183

13-Sep

14,174,450

5,008,572

901,354

2,777,690

5,428,489

58,345

13-Oct

14,433,037

5,025,345

905,094

2,814,961

5,627,650

59,987

13-Nov

14,601,111

5,065,587

893,271

2,823,483

5,759,760

59,010

13-Dec

14,715,533

5,107,068

858,532

2,821,261

5,871,949

56,723

14-Jan

14,639,261

5,165,033

859,874

2,833,527

5,722,459

58,368

14-Feb

15,042,821

5,211,019

859,432

2,887,616

6,025,668

59,086

14-Mar

15,102,528

5,260,617

835,338

2,903,104

6,043,112

60,357

%∆ Dec 11-Mar 14

27.32%

20.75%

-20.16%

13.08%

57.29%

21.71%

%∆ July 12-July 13

10.68%

3.76%

-9.62%

6.65%

26.19%

-17.64%

%∆ Aug 13-Mar 14

9.24%

6.81%

-6.49%

6.49%

15.69%

5.55%

* Normally Municipal Debt is grouped within C orporate Debt; for the purpose of this table, that component is separated out.

Source: US Department of the Treasury and Wells Fargo Securities, LLC

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Market EKG: Traditional Relationships Changed Dramatically After 2008-2009 AAA GO Municipal-Treasury Ratios (2003 - Present)

350% 2005-2007 2008-Present 201 4 Y TD

300%

Av erage Muni-T reasury Ratios 1 Y ear 1 0 Y ear 7 4% 83% 1 31 % 97 % 1 59% 90%

30 Y ear 92% 1 07 % 1 02%

Ratio

250%

200%

150%

100%

50%

Muni-Treasury Ratio, 1 Year Muni-Treasury Ratio, 10 Year Muni-Treasury Ratio, 30 Year

0%

05

06

07

08

As of June 6, 2014 Source: Thomson Reuters and Wells Fargo Securities, LLC

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09

10

11

12

13

14

Date

7

A Proxy for Retail Supply/Demand: IShares MUB—9/10/07-07/07/2014 ($3.29 billion market cap) •Note the sell-off beginning November 2010 through mid-January 2011 also note increased trading volume •Investors that bought on the sell-off saw double-digit returns in 2011 •Note sell-off following the “taper” discussion

Positive gains through 2011

Q4 Sell-off

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8

Quick Employment Snapshot: A Visual on the Lag in State/Local Government Some Previous Cuts are Being Restored

Period 2007 2008 2009 2010 2011 2012 2013 2014* ∆2007-2009 ∆2009-2014 ∆2013-2014

June 2007 - June 2014, seasonally adjusted June Employment Total Nonfarm Private Total Govt Total Federal 138,017 115,810 22,207 2,729 137,631 115,114 22,517 2,759 130,944 108,368 22,576 2,815 130,457 107,696 22,760 3,194 131,836 109,680 22,156 2,859 133,951 112,028 21,923 2,824 136,285 114,433 21,852 2,768 138,780 116,872 21,908 2,713 -5.12% 5.98% 1.83%

-6.43% 7.85% 2.13%

1.66% -2.96% 0.26%

3.15% -3.62% -1.99%

State 5,131 5,179 5,176 5,139 5,079 5,056 5,034 5,065 0.88% -2.14% 0.62%

Local 14,347 14,579 14,586 14,428 14,219 14,043 14,051 14,130 1.67% -3.13% 0.56%

* preliminary Source: US Department of Labor, Bureau of Labor Statistics and Wells Fargo Securities, LLC

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9

Public Pensions: First, A Lay of the Land In 1981 the ratio of active members/retirees was 2.8. In 2012 it was 1.6.

State and Local Public-Employee Retirement Systems and Membership Fiscal Year 2012 Mem bership State and type of governm ent

Num ber of system s Total

Active m em bers

Inactive m em bers

Total beneficiaries receiving periodic benefit paym ents

Ratio of Active m em bers to beneficiaries

Mainland United States 3,998 19,587,970 14,374,391 5,213,579 9,012,347 1.6 State (including agent and cost share plans managed by state on behalf of local government) 227 17,544,912 12,643,450 4,901,462 7,622,748 1.7 Local 3,771 2,043,058 1,730,941 312,117 1,389,599 1.2 County 174 561,808 473,523 88,285 320,720 1.5 Municipality 2,534 1,217,193 1,031,784 185,409 901,367 1.1 Township 710 44,419 37,437 6,982 26,092 1.4 Special district 334 146,411 128,889 14,522 94,801 1.4 School district 19 73,227 59,308 13,919 46,619 1.3 Puerto Rico Employee Retirement System 1 252,427 134,566 117,861 1.1 Teachers Retirement System 1 79,950 42,707 738 36,505 1.2 Source: Census.gov: United States membership is as of Fiscal Year 2012; Puerto Rico figures are as of June 2012 audit of the General Retirement System and Teachers Retirement System; Deloitte. Note: this does not include the three other Puerto Rico pension plans: the Judiciary Retirement System; the Puerto Rico Electric power Authority Retirement System; the University of Puerto Retirement System.

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Public Pensions: Key Elements to Look For States Paying 100% or More of the Annual Required Contribution, 2012

States Paying Less than 80% of the Annual Required Contribution, 2012

Funded What assumptions are they Ratio Alabama 70 making about amortizing 53 unfunded liabilities? What kind of Connecticut Georgia 85 cost of living adjustments do they Maine 70 grant? What discount rate is Mississippi 64 New York 94 used?

North Carolina 96 How objective is governance?

Oklahoma 56 (i.e. are plan sponsors valuing Rhode Island 49 South Carolina 66 assets themselves? Are they South Dakota 66 granting special bonuses?)

Tennessee 96 Are mortality tables up-to-date?

Utah 82 West Virginia 58 Wisconsin 100 Source: Pew Charitable Trusts

Funded Ratio California 77 Florida 82 Illinois 40 Kansas 56 Kentucky 47 Montana 64 New Jersey 64 North Dakota 63 Ohio 67 Oregon 91 Pennsylvania 64 Texas 82 Virginia 65 Washington 95 Source: Pew Charitable Trusts

 Are they paying in?  Are they meeting target returns on assets? 





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Public Pensions: The Importance of Earnings Revenues of Total Government Employee Retirement Systems, 1993-2012 100% 80% 60%

Revenue Share

40% 20% 0% Government Contributions

-20%

Employee Contributions Earnings on Investments

-40% -60% Total Revenues ($ billions) Earnings as % of Total Assets

-80% -100%

1993

1994

1995

1996

1997

1998

$125.9 8.9%

$133.3 7.9%

$148.8 8.0%

$190.5 10.2%

$227 $261.3 10.9% 11.5%

1999

2000

2001

$263.2 10.4%

$297 10.7%

$123.2 2.7%

2002

2003

2004

2005

2006

2007

($7.5) (3.5%)

$147.7 $407.3 $354.3 $392.8 $578.8 3.3% 12.6% 9.8% 10.2% 14.3%

2008

2009

2010

2011

2012

$44.9 ($490.7) $471.6 $616.1 $239.5 (2.4%) (25.7%) 12.9% 15.8% 3.1%

Source: US Census and Wells Fargo Securities, LLC

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Public Pensions: The Importance of Earnings Quarterly Market Value Change in 100 Largest State and Local Government Pension Plan Assets (2006 - 2014, 1st Quarter) 10.0% 2006

2012 2011 2010

2007

5.0%

2013 2014

0.0%

-5.0%

2008 2009

-10.0%

-15.0% Year Based on data as of June 24, 2014 Note: 100 largest plans from 2009 to present.

Source: US Census Bureau and Wells Fargo Securities, LLC

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13

Public Pensions: A Few Examples Illinois Teachers' Retirement System Dollars in Millions

Year 2013 2012 2011 2010 2009 2008 2007

Actual Contribution $ 2,858 $ 2,559 $ 2,324 $ 2,250 $ 1,602 $ 1,170 $ 817

Annual Required Contribution $ 3,582 $ 3,430 $ 2,743 $ 2,482 $ 2,109 $ 1,949 $ 2,052

Percent Contributed 80% 75% 85% 91% 76% 60% 40%

Actuarial Value of Plan Assets $ 38,155 $ 37,945 $ 37,770 $ 37,439 $ 38,026 $ 38,431 $ 41,909

$ $ $ $ $ $ $

Actuarial Accrued Liability 93,887 90,025 81,300 77,293 73,027 68,632 65,648

Unfunded Actuarial Accrued Liability $ 55,732 $ 52,080 $ 43,530 $ 39,854 $ 35,001 $ 30,202 $ 23,739

Funded Ratio 41% 42% 46% 48% 52% 56% 64%

Unfunded Actuarial Accrued Liability $ 20,111 $ 19,220 $ 17,569 $ 16,154 $ 12,034 $ 10,331 $ 7,376

Funded Ratio 41% 42% 44% 46% 54% 59% 68%

Unfunded Actuarial Accrued Liability $ 22,843 $ 21,614 $ 20,235 $ 18,348 $ 14,298 $ 12,846 $ 10,202

Funded Ratio 34% 35% 36% 37% 43% 46% 54%

Source: Teachers' Retirement System of the State of Illinois and Wells Fargo Securities, LLC

Illinois State Universities Retirement System Dollars in Millions

Year 2013 2012 2011 2010 2009 2008 2007

Actual Contribution $ 1,402 $ 986 $ 774 $ 697 $ 452 $ 345 $ 261

Annual Required Contribution $ 1,794 $ 1,702 $ 1,519 $ 1,278 $ 1,147 $ 972 $ 968

Percent Contributed 78% 58% 51% 54% 39% 36% 27%

Actuarial Value of Plan Assets $ 14,263 $ 13,950 $ 13,946 $ 13,967 $ 14,282 $ 14,586 $ 15,986

$ $ $ $ $ $ $

Actuarial Accrued Liability 34,373 33,170 31,514 30,120 26,316 24,918 23,362

Source: Teachers' Retirement System of the State of Illinois and Wells Fargo Securities, LLC

Illinois State Employees' Retirement System Dollars in Millions

Year 2013 2012 2011 2010 2009 2008 2007

Actual Contribution $ 1,530 $ 1,396 $ 1,125 $ 1,093 $ 805 $ 588 $ 358

Annual Required Contribution $ 1,741 $ 1,615 $ 1,289 $ 1,177 $ 1,003 $ 986 $ 824

Percent Contributed 88% 86% 87% 93% 80% 60% 43%

Actuarial Value of Plan Assets $ 11,877 $ 11,477 $ 11,160 $ 10,962 $ 11,000 $ 10,995 $ 12,079

$ $ $ $ $ $ $

Actuarial Accrued Liability 34,721 33,091 31,395 29,309 25,298 23,841 22,281

Source: State Employees' Retirement System of Illinois and Wells Fargo Securities, LLC

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Public Pensions, Continued Puerto Rico Employees' Retirement System ($000s)

Year

Annual Actuarial Unfunded Actual Percent Actuarial Value Accrued Funded Required Actuarial Contribution Contribution Contributed of Plan Assets Liability Accrued Liability Ratio 2012 $ 589,743 $ 2,019,467 29% $ 1,237,532 $ 27,645,786 $ 26,408,254 5% 2011 $ 701,709 $ 1,734,979 40% $ 1,723,811 $ 25,457,354 $ 23,733,543 7% 2010 $ 534,275 $ 1,459,774 37% $ 1,664,991 $ 17,501,761 $ 17,836,770 9% 2009 $ 594,509 $ 1,258,695 47% $ 1,842,143 $ 18,943,586 $ 17,101,443 11% 2008 $ 581,285 $ 1,191,275 49% $ 2,607,086 ND ND NA 2007 $ 566,524 $ 816,472 69% $ 2,891,501 $ 16,769,512 $ 13,878,011 21% Source: Deloitte 2012 audit of Employee's Retirement System and Milliman actuarial report for 2007 Puerto Rico Teachers' Retirement System ($000s)

Year 2012 2011 2010 2009 2008 2007

Annual Actuarial Unfunded Actual Percent Actuarial Value Accrued Funded Required Actuarial Contribution Contribution Contributed of Plan Assets Liability Accrued Liability Ratio $ 174,571 $ 659,334 26% $ 2,099,000 $ 12,350,836 $ 10,251,836 20% $ 161,528 $ 528,170 31% $ 2,386,000 $ 11,448,609 $ 9,062,746 26% $ 166,384 $ 477,213 35% $ 2,222,000 $ 9,280,000 $ 7,058,000 31% $ 172,841 $ 393,871 44% $ 2,158,000 $ 8,722,000 $ 6,564,000 33% $ 159,101 $ 341,495 47% ND ND ND NA $ 147,597 $ 341,160 43% $ 3,163,000 $ 7,756,000 $ 4,593,000 69% Source: Deloitte 2012 audit of Employee's Retirement System

California State Teachers' Retirement System- Defined Benefit Program Dollars in Millions

Year 2013 2012 2011 2010 2009 2008 2007

Actual Contribution $ 2,925 $ 2,855 $ 2,796 $ 2,693 $ 2,867 $ 2,864 $ 2,649

Annual Required Contribution $ 6,629 $ 6,230 $ 5,985 $ 4,924 $ 4,547 $ 4,362 $ 3,980

Percent Contributed 44% 46% 47% 55% 63% 66% 67%

Actuarial Accrued Liability

Actuarial Value of Plan Assets $ $ $ $ $ $

144,232 142,930 140,291 145,142 155,215 148,427

$ $ $ $ $ $

214,765 207,770 196,315 185,683 177,734 167,129

Unfunded Actuarial Accrued Liability $ $ $ $ $ $

70,533 64,840 56,024 40,541 22,519 18,702

Funded Ratio 67% 69% 71% 78% 87% 89%

Note: ARC for given year may be based on earlier valuation period. For example, 2013 ARC is based on June 30, 2012 actuarial valuation. ARC s for 2008, 2010 and 2012 are based on valuations at years 2006, 2008 and 2010, respectively.

Source: C alifornia State Teachers' Retirement System and Wells Fargo Securities, LLC

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And Some Plans that Maintain Funding Discipline North Carolina Teachers' and State Employees' Retirement System Dollars in Millions

Year 2013 2012 2011 2010 2009 2008 2007

Actual Contribution $ 1,095 $ 988 $ 659 $ 483 $ 472 $ 403 $ 332

Annual Required Contribution $ 1,053 $ 988 $ 903 $ 483 $ 472 $ 407 $ 332

Percent Contributed 104% 100% 73% 100% 100% 99% 100%

Actuarial Accrued Liability

Actuarial Value of Plan Assets $ $ $ $ $ $

59,912 58,125 57,102 55,818 55,128 55,283

$ $ $ $ $ $

63,630 61,847 59,876 58,178 55,519 52,815

Unfunded Actuarial Accrued Liability $ $ $ $ $ $

3,718 3,722 2,774 2,360 391 (2,468)

Funded Ratio 94% 94% 95% 96% 99% 105%

Source: North C arolina and Wells Fargo Securities, LLC

Wisconsin Retirement System Dollars in Millions

Year 2013 2012 2011 2010 2009 2008 2007

Actual Contribution

Annual Required Contribution

$ $ $ $ $ $

$ $ $ $ $ $

826 781 742 697 677 645

826 781 687 646 645 614

Actuarial Accrued Liability

Percent Actuarial Value Contributed of Plan Assets 100% 100% 108% 108% 105% 105%

$ $ $ $ $ $

78,613 78,940 80,627 78,911 77,159 79,792

$ $ $ $ $ $

78,683 79,039 80,759 79,105 77,412 80,080

Unfunded Actuarial Accrued Liability $ $ $ $ $ $

70 99 132 193 253 288

Funded Ratio 100% 100% 100% 100% 100% 100%

Source: Wisconsin Department of Employee Trust Funds and Wells Fargo Securities, LLC

Maine Public Employees Retirement System- Defined Benefit Plan Dollars in Millions

Year 2013 2012 2011 2010 2009 2008 2007

Actual Contribution $ 292 $ 275 $ 352 $ 342 $ 332 $ 318 $ 314

Annual Required Contribution $ 292 $ 275 $ 346 $ 330 $ 332 $ 318 $ 314

Percent Contributed 100% 100% 102% 103% 100% 100% 100%

Actuarial Value of Plan Assets $ 11,452 $ 11,076 $ 10,915 $ 10,415 $ 10,467 $ 10,893 $ 10,437

$ $ $ $ $ $ $

Actuarial Accrued Liability 14,394 14,012 13,603 14,799 14,410 13,675 13,089

Unfunded Actuarial Accrued Liability $ 2,942 $ 2,935 $ 2,688 $ 4,384 $ 3,943 $ 2,782 $ 2,652

Funded Ratio 80% 79% 80% 70% 73% 80% 80%

Source: Maine Public Employees Retirement System and Wells Fargo Securities, LLC

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Which States Authorize Chapter 9 Filings?

(We draw from the Bond Dealers Association “Final BDA Bankruptcy White Paper” published after the Detroit filing and prepared by Nixon Peabody, although there are many summaries available on the Internet) There are four basic approaches to authorization:  Specific Prohibition: Georgia  No Specific Authorization: Alaska, Delaware, Hawaii, Indiana, Kansas, Maine, Maryland, Massachusetts, Mississippi, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin and Wyoming, along with the District of Columbia.  Specific Authorization: Care should be taken here to examine the statute since some states provide authorization for only certain types of municipal entities while others are excluded. For example, the Arizona, Colorado, Idaho, Kentucky and Washington statutes authorize “taxing districts,” Montana excludes counties, New York only authorizes its counties, cities, towns and villages, and Oregon authorizes only its irrigation or drainage districts.  Conditional Authorization: Some states impose specific conditions for filing. Each state differs in approach so we suggest review of the specifics. For example, Connecticut and Illinois, New Jersey, North Carolina and Ohio require the consent of a state official before a Chapter 9 filing is authorized. Other states, like Michigan, Pennsylvania and Rhode Island, impose a rigorous state oversight process. The process may include appointment of a receiver and the approval of the receiver or other state official may be required before a filing is authorized. In Michigan, Public Act 436 allowed the governor to appoint Kevyn D. Orr as Detroit’s Emergency Manager to take over control of the City. Similarly, Rhode Island’s authorizing statute required the town of Central Falls to have a receiver to assume responsibility for the town’s financial dealings before a filing.  Still other states, like California, require that the municipality engage in a 60-day meditation process (or certify that an emergency exists that does not allow time for mediation) before a Chapter 9 filing is authorized.  Conditional authorization may make the beginning of the Chapter 9 process litigious—with various parties arguing over the eligibility standards in state as well as federal law. For example, the City of Stockton engaged in the mediation process, was not successful and a Chapter 9 filing occurred. Creditors objected to the Chapter 9 filing asserting that the city had not negotiated in good faith, because it had refused to negotiate with CalPERS, one of its largest creditors. The city responded by saying that it had negotiated in good faith. At the heart of this dispute is a set of California state laws that the city and CalPERS assert protect CalPERS from municipal bankruptcies. Bondholders have contested that assertion. Without resolving the dispute, the bankruptcy court found that the city was eligible for Chapter 9 relief stating that “[n]egotiation is by definition a two-way street. You cannot negotiate with a stone wall.”

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Disclosures Additional information is available on request.

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