Toolkit · Local Government Finance

The Eligibility Analysis, Cash Flow Forecast, and Plan of Adjustment Toolkit

11 U.S.C. § 109

Type
Toolkit
Jurisdiction
National
Date
2024-12-07
Topic
Local Government Finance

This toolkit supplies the working documents for municipal fiscal distress work. It opens with an eligibility analysis worksheet and a state authorization research memorandum, followed by an insolvency showing and a negotiation log built to survive an eligibility objection. Middle instruments include a cash flow model specification, a structural gap computation, and a monitoring dashboard. Later instruments cover a plan of adjustment outline with a discrimination justification, a creditor objection outline, a security characterization memorandum, and an oversight authority memorandum. Each instrument states the failure it prevents.

The Eligibility Analysis, Cash Flow Forecast, and Plan of Adjustment Toolkit

Local Government Finance > Municipal Fiscal Distress, Receivership, and Chapter 9 | Published 7 December 2024 - Updated 16 February 2026 | UpLaw - uplaw.us

Instrument 1: Eligibility analysis worksheet

Complete from documents before any filing. Every element is contested and every one is cumulative under 11 U.S.C. § 109.

Element Requirement Evidence Conclusion
Municipality Political subdivision, public agency, or instrumentality — 11 U.S.C. § 101 Enabling act; charter; state characterization; taxing power; governance
State authorization Specific authorization by law or by an empowered officer or organization The statute or the officer's action, quoted
Conditions on authorization State approval; board consent; required findings Documentation of satisfaction
Insolvency Generally not paying debts as they come due, or unable to Instrument 3
Desire to effect a plan Governing body resolution stating the purpose
Negotiation prerequisite One of four Instrument 4

The threshold question. State authorization. Where it is absent, the analysis ends and moves entirely to the oversight route, because 11 U.S.C. § 903 forecloses a state mechanism binding nonconsenting creditors — Puerto Rico v. Franklin California Tax-Free Trust.

Instrument 2: State authorization memorandum

1. The statute. [Quote the provision authorizing municipalities to be debtors, or state that none exists.]

2. Scope. Which entities are covered — all political subdivisions, specified classes, or particular entities. Is this municipality within the scope?

3. Conditions. Approval by [the governor / a state official / an oversight board]; findings required; procedural prerequisites; and whether any are discretionary.

4. Process to satisfy conditions. Who decides, on what record, in what time, and whether the decision is reviewable.

5. Sunset or limitation. Whether the authorization is time-limited or restricted by purpose.

6. History. Prior filings by municipalities in this state, and any judicial construction of the authorization.

7. Conclusion. Authorized / conditionally authorized / not authorized / prohibited.

8. If not authorized. The available state mechanisms, and the constraint that none may bind nonconsenting creditors under 11 U.S.C. § 903.

Why this is the first document. It determines whether the federal chapter exists for this client. Everything else is contingent on it.

Instrument 3: Insolvency showing

The cash-flow test, documented rather than asserted.

Component Content
Current obligations schedule Payroll, debt service, pension contributions, vendor payables, and statutory obligations, by due date, for [12-24] months
Available resources Unrestricted cash by fund; available lines; assets liquidatable without impairing operations
Restricted funds Identified and excluded, with the restriction's source
Cash flow projection Weekly or monthly, showing the point at which obligations exceed resources
Debts subject to bona fide dispute Identified and excluded from the analysis
One-time measures available Enumerated, with the amount and whether each is repeatable
Borrowing capacity Legal capacity and market access, realistically assessed
Conclusion Generally not paying / unable to pay, with the date

The common defect. A showing that recites large unfunded liabilities. Those do not establish insolvency; inability to meet current obligations does, and the schedule above is what establishes it.

Instrument 4: Negotiation log

The document set that decides eligibility. Maintain from first contact.

Date Creditor or class Method Event Documents provided Response period given Response received Municipality's response

Companion file, by class.

  • [ ] Creditor identification, with holders to the extent determinable
  • [ ] Financial statements, cash flow model, actuarial valuation, and debt schedules transmitted, with dates
  • [ ] Each proposal with actual numbers, dated, with the transmittal record
  • [ ] The response period allowed for each
  • [ ] Meeting records: date, participants, agenda, outcome
  • [ ] Counterproposals received and the municipality's response to each
  • [ ] The impasse point and the reason
  • [ ] Where impracticability is relied upon: the number and dispersion of creditors and the efforts made

The test. Whether the municipality proposed something creditors could evaluate, gave them the information to evaluate it, and responded to what they said.

The failure mode. A record showing a decision to file followed by a brief negotiation conducted to satisfy the element.

Instrument 5: Cash flow model specification

Both sides litigate this document. Build it to survive examination.

Structure. Multi-year — [10] years for a plan, [3-5] for an insolvency showing. By fund, with the general fund detailed and enterprise funds separate because their revenues are pledged.

Revenue by source, with the driver stated. Property tax on assessed value and rate. Sales tax on taxable sales. Income or wage tax on employment and wages. State aid on the formula and the state's own fiscal condition. Charges on volume and rate. Investment income. One-time items identified as such and not carried forward.

Expenditure by category, with the driver stated. Personnel by headcount and contract, including escalators. Pension and retiree health at the actuarially determined contribution, not the budgeted amount, with the discount rate stated. Debt service on the existing schedule. Operations with an inflation assumption. Capital replacement and deferred maintenance funded, not omitted.

Collection rate consistent with recent experience, not with historical norms.

Scenarios. Base; downside; and continuation of the current trend without intervention.

Sensitivity on the three or four drivers that move the result.

Reconciliation to the audited financial statements and to the actuarial valuation.

Outputs. The structural gap — recurring revenues less recurring expenditures — stated separately from the total gap that one-time measures currently close; the year of cash exhaustion; and the capacity available for restructured debt service.

Assumptions that get attacked. Assessed value growth above the regional trend; population and employment assumed to stabilize; state aid assumed level; pension contribution at the budgeted rather than the actuarially determined amount; health care trend understated; collection rate above recent experience; capital omitted; personnel flat despite contract escalators; and one-time items carried forward.

Instrument 6: Structural gap computation

The single most useful number, and the one most often obscured.

Line Amount
Total general fund revenues, current year
Less: one-time revenues — asset sales, settlements, non-recurring grants, reserve draws, interfund transfers
Recurring revenues
Total general fund expenditures, current year
Plus: pension contribution shortfall against the actuarially determined contribution
Plus: deferred capital replacement, at depreciation
Plus: deferred maintenance accrued in the period
Less: one-time expenditures
Recurring expenditures
Structural gap
Total budget gap as reported
Difference — the amount obscured by one-time measures

How to present it. Three numbers to the governing body: the recurring gap; the one-time measures used this year; and the year on current trend when the ordinary options are exhausted. This presentation is more persuasive than any narrative and is produced entirely from documents the municipality already has.

Instrument 7: Monitoring dashboard

For a state, an overseer, or a creditor.

Indicator Current Prior 3 years Threshold Status
Annual report filed on time; unqualified opinion
Unassigned fund balance as % of expenditures
Structural gap as % of recurring revenues
One-time revenues as % of budget
Interfund transfers used to balance
Accounts payable days
Short-term cash flow borrowing
Pension contribution as % of the actuarially determined contribution
Pension funded ratio; discount rate
Retiree health liability; funding approach
Debt service as % of operating budget
Capital spending relative to depreciation
Assessed value trend
Population trend
Tax collection rate; delinquency trend
Employment concentration

Design point. Defined thresholds triggering defined responses. Discretionary regimes intervene late, because intervention is unwelcome and the discretion is exercised by people who prefer to wait.

Instrument 8: Plan of adjustment outline

Only the debtor may file — 11 U.S.C. § 941.

Article I. Definitions and classification. Classes stated, with the basis for each. Anticipate objections that classes were constructed to produce an accepting impaired class.

Article II. Treatment by class. For each: impairment, distribution, timing, and source of payment. Pledged special revenue obligations identified as unimpaired, since those revenues continue to be applied to them.

Article III. Executory contracts and leases. Assumed or rejected under 11 U.S.C. § 365, with collective bargaining agreements addressed specifically and the interaction with state labor law stated.

Article IV. Means of implementation. Revenue measures, expenditure changes, asset dispositions, and any new borrowing, with the legal authority for each — because 11 U.S.C. § 943 requires that the debtor not be prohibited by law from taking these actions.

Article V. Pensions. Treatment, the state law protection asserted or negotiated around, the consent obtained, and the consideration provided.

Article VI. Feasibility. Reference to the model at Instrument 5, with the projection attached.

Article VII. Discrimination justification. Instrument 9.

Article VIII. Conditions to confirmation and effectiveness. Including any regulatory or electoral approval.

Article IX. Effect of confirmation and retained jurisdiction. 11 U.S.C. § 944; 11 U.S.C. § 945.

Instrument 9: Discrimination justification

Required wherever classes of similar claims are treated differently — the pension versus bondholder question in nearly every case.

Element Content
The classes and their treatment Percentage recovery, form, and timing for each
The legal position of each class Statutory or constitutional protection; lien status under state law per Butner v. United States; contractual rights
Essentiality Whether the favored class provides services necessary to continued operation
Capacity What the municipality can pay in total, from the model
Marginal effect Whether eliminating the discrimination would materially change the disfavored class's recovery
Consent Whether the favored class accepted, and what it gave up
Conclusion Why the discrimination is not unfair

The evidentiary point. This is an evidence question, not a characterization question. A justification asserting that pensioners are protected by the state constitution must establish the protection's actual scope, and a justification asserting capacity must rest on the model.

Instrument 10: Creditor objection outline

I. Eligibility — 11 U.S.C. § 109. A. Not a municipality. [Where the entity's status under 11 U.S.C. § 101 is doubtful.] B. Not specifically authorized. [Quote the state provision; argue scope or condition.] C. Not insolvent. [Test the cash-flow showing against the model; long-term liabilities do not establish insolvency.] D. No good faith negotiation. [The productive objection. Cite the absence of numbered proposals; information withheld; response periods too short; counterproposals ignored; the timing of the decision to file.]

II. Class construction. [Gerrymandering to produce an accepting impaired class.]

III. Unfair discrimination — 11 U.S.C. § 943. [Instrument 9, from the other side: the favored class's legal position is weaker than asserted; capacity is greater than modeled; eliminating the discrimination would materially change the recovery.]

IV. Feasibility. [Attack the model: growth assumptions against the regional trend; deferred maintenance omitted; pension contributions below the actuarially determined amount; collection rate above experience; one-time items carried forward.]

V. Prohibited by law. [Where the plan requires action state law forbids — a revenue measure requiring approval not obtained, or a pension reduction state law prohibits.]

VI. Best interests. [Where the alternative reasonably available to creditors is better than the plan — recognizing that the alternative is continued nonpayment and that this objection rarely succeeds.]

VII. Special revenue treatment. [Where pledged revenues are being diverted through inflated operating expense allocations.]

Instrument 11: Security characterization memorandum

The threshold question for any municipal creditor, and a state law question under Butner v. United States.

1. The obligation. Series, amount, maturity, and the authorizing instrument.

2. The pledge. Quote it. Full faith and credit; ad valorem taxes without limitation; taxes within a limit; or specified revenues.

3. Statutory lien. Does state law create a lien on the pledged revenues, and of what priority? Is it perfected automatically?

4. Special revenues. Are the pledged revenues special revenues of a system, such that payments continue after a filing subject to system operating expenses?

5. Operating expense exposure. For a special revenue credit, what expenses are payable ahead of debt service, and could they be inflated to divert revenue?

6. Competing pledges. Prior liens; parity obligations; and any additional bonds test constraining further parity debt.

7. Remedies outside a case. Mandamus; receivership of the system; rate covenant enforcement.

8. Remedies inside a case. Recognizing that 11 U.S.C. § 362 and 11 U.S.C. § 922 foreclose collection and mandamus, and that 11 U.S.C. § 904 limits the court.

9. Conclusion. Secured / unsecured; special revenue / general; and the practical recovery posture.

Instrument 12: Oversight authority memorandum

For a state, a board, or a creditor assessing what the state route can accomplish.

1. The regime. Statutory citation; the levels of intervention; and the trigger for each.

2. The board's or manager's powers. Budget review or approval; borrowing approval; contract review, modification, or rejection; personnel; asset disposition; and any authority to authorize a filing.

3. Contract modification exposure. Any power to modify existing obligations is impairment. Analyze under Energy Reserves Group, Inc. v. Kansas Power and Light Co., with heightened scrutiny where the municipality is the obligor per United States Trust Co. of New York v. New Jersey, against the background that impairment is not categorically barred — Home Building and Loan Association v. Blaisdell; Faitoute Iron and Steel Co. v. City of Asbury Park.

4. The composition limit. No state mechanism may bind nonconsenting creditors — 11 U.S.C. § 903; Puerto Rico v. Franklin California Tax-Free Trust.

5. Board structure. Appointment, removal, and accountability, noting the framing in Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, LLC.

6. Democratic accountability. State constitutional local self-government provisions; transition back to elected governance; and, where the displaced government serves a particular population, voting rights considerations.

7. What oversight can accomplish that a plan cannot. Governance, management capacity, and revenue structure.

8. What it cannot. Bind dissenters — which is the entire case for preserving a filing option as a backstop.

A closing note

The instruments here divide the same way the practice does. Instruments 6 and 7 are prevention: cheap, unglamorous, and capable of changing outcomes years in advance. Instruments 1 through 5 are the analysis that determines whether a filing is even possible. Instruments 8 through 12 are the case itself.

A practitioner who is engaged at Instrument 6 can be useful. One engaged at Instrument 8 is administering a process whose outcome was determined by decisions made years earlier — and the constitutional structure of the chapter, traceable to Ashton v. Cameron County Water Improvement District No. One and United States v. Bekins, guarantees that the tools available at that stage are far weaker than clients expect.

Use them in that order, and start earlier than seems necessary.

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