Legal Memorandum


TO: Missouri Council for a Better Economy
FROM: William J. Kuehling, Senior Partner, Polsinelli PC Kenny C. Hulshoff, Shareholder, Polsinelli PC
SUBJECT: Key Questions – Public Finance Study
DATE: February 4, 2014

Below please find our Firm’s responses to certain questions that were posed as part of the Public Finance Study.

1. If the City rejoins the County and the City subsequently goes bankrupt, who has to pay the City’s debts?

In the event the City of St. Louis became a municipality in St. Louis County and then subsequently filed for protection under Chapter 9 of the United States Bankruptcy Code, absent a new agreement to the contrary, the City of St. Louis would continue to be solely responsible for its legal debts, to the extent approved by the Bankruptcy Court.  Neither of St. Louis County, the State of Missouri, nor any other third party would become responsible for any of the City’s debts and/or other expenses, absent their explicit agreement to do so.  There is no law (either State or Federal) or court precedent that would lead to any other conclusion.

In the United States, a municipality may file for bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code.

One of the conditions that must be met prior to a municipality availing itself of Chapter 9 is that it must have specific State authorization to file.  Missouri is one of only 12 states that specifically authorize its municipalities to so file without any further condition.  (See 427.100 RSMo.)

In recent history, five (5) Missouri municipalities have filed for protection under Chapter 9.  In no case was the host County or the State held responsible for any of the debts of the municipality.

So long as the County or State does not agree to become a guarantor on any municipal obligations, they cannot be held in any way responsible.

To hold otherwise would make these entities unwitting “insurers” of the debts of not only the City of St. Louis, but of the hundreds of other municipalities scattered across the State of Missouri.  Such an outcome would encourage financial irresponsibility and lead to fiscal chaos.

In the event of a Chapter 9 filing, all aspects of the municipality are subject to the jurisdiction of the court; all debts (both general obligations bonds and revenue bonds); all matters of employment; all contracts; and potentially, all retirement obligations.  However, the court does not have authority to dragoon in other unrelated parties, including governmental jurisdictions, and compel payment from them for items they never obligated themselves for.

2. If the City of St. Louis rejoins St. Louis County, who is responsible for the unfunded liability in the City employees’ pension systems?

So long as the City of St. Louis remains the employer of its police, fire, and City employees, it would remain responsible for all pension costs including any unfunded liability in the City employees’ pension systems.  The act of the City of St. Louis re-entering St. Louis County as a municipality would not automatically change its status as the employer of these employees, nor change its responsibility as employer to those employees.

This would be no different than the situation of other St. Louis County municipalities that have their own retirement systems for certain employees.  St. Louis County is not responsible for any unfunded liability in these plans now, nor will they be in the future.

The City of St. Louis has three employee retirement plans covering substantially all full‑time employees.  The plans are the Employment Retirement System (“ERS”), the Firemen’s Retirement Systems (“FRS”) and the Police Retirement System (“PRS”).  Each has a different source of authority.  The ERS is established pursuant to City Ordinance ; the FRS pursuant to State Statute and City Ordinance , and the PRS pursuant to State Statute.   If the City were to rejoin St. Louis County, it should be noted that St. Louis County would have no authority to make any legal changes to the existing City of St. Louis plans.

While all of these plans vary as to the source of authority, benefit design, governance and employee contribution requirements, common to all of them is that the City of St. Louis, as employer, is required to make the actuarially required employer contribution.

In the fiscal year ending 2012, the City of St. Louis made total pension contributions totaling $79,070,000 to the three funds, and maintained funding ratios of 75.3% for ERS, 81.1% for FRS, and 77.9% for the PRS.

3. Would any financial responsibility for any current City of St. Louis obligation (either debt or leasehold) automatically transfer from the City to the County if the City re‑entered the County as a municipality?

No, there are no currently existing City of St. Louis obligations which would automatically become the partial or full responsibility of the County, were the City to re-enter the County as a municipality.

4. The City of St. Louis collects sales tax.  If the City rejoins the County, will the City participate in the County pool?  What will this look like?

If the City of St. Louis rejoins St. Louis County as a municipality, it would neither participate as a “pool” or a “point of sale” City, and would not receive any distribution of funds from the County.

The provisions of state law which govern the current division of sales taxes in St. Louis County (66.620 RSMo. 2012) would not be affected by the re-entry of the City of St. Louis as a municipality into St. Louis County.  The City of St. Louis would not participate in either pool established by law.  In any re-entry of the City of St. Louis into St. Louis County, transitional provisions would have to be made to determine how County sales taxes would apply in the City of St. Louis and how the City would share in sales tax revenues, just as other County municipalities do currently.

The statutory enactments which have put in place the scheme by which sales taxes are divided between the County and the various municipalities are the products of years of work by multiple legislatures.  The law is extremely complex, taking into account which cities once had a municipal sales tax,  potential new incorporations, annexations of unincorporated areas by existing cities, and consolidations among existing cities,

In broad terms, the law establishes two categories of cities – Group A cities, generally referred to as Point of Sale cities, and Group B cities, generally referred to as “Pool” cities. Group A cities were those that had passed a general municipal sales tax before the County passed a general county sales tax and which did not opt to become a Group B city.  With various caveats, they are allowed to keep a majority of the revenue generated within their own borders.  Group B cities are those from which most of the revenue raised by the sales tax goes into a pool which is then divided mainly based on population.

Not surprisingly, the law is silent in regards to what would happen in the event the City of St. Louis re-entered St. Louis County, since there is no indication that ever, in the consideration, drafting or implementation of these provisions that such a possibility was ever contemplated by the drafters.  The City of St. Louis does not fit under either definition of Group A or Group B, since both refer to areas that were “located wholly or partly within the county” as of the date of the statute, which clearly the City of St. Louis was not.

To attempt to force the City of St. Louis post facto into this carefully constructed scheme would wreak havoc to the carefully constructed structure that was put in place by the General Assembly.

This would not be the result that the Legislature intended when it enacted the laws relating to the distribution of taxes in St. Louis County as it currently exists.

The paramount goal in construing a statute is to give effect to the legislative intent, and in doing so, it is proper to consider its historical background in which the enactment took place. Kansas City v. Travelers Insurance Company , 284 S.W.2 d 874.

Similarly, in State ex rel Henderson v. Proctor , 361 S.W. 2 d 802, the Missouri Supreme Court quoted the case of State ex inf. Kemp, etc. V. Pretended Consolidated School District No. 1 of Montgomery County , 359 Mo. 639, 22 S.W. 2 d 484,488 and stated:

“We may not capriciously ignore the plan language of the statute, but in determining what the language really means, we may consider the entire purpose and policy of the statute and ‘the language in the totality of the enactment’ and construe it in the light of ‘what is below the surface of the words and yet fairly a part of them’”.

The statute on sales tax distribution in St. Louis County is a very specialized law, drawn up to address a very specific set of circumstances that did not include the City of St. Louis being a municipality within the County.  To attempt to use it for purposes for which it was never intended would work an unintended injustice to all involved.

[1] The ERS system covers all non-uniformed employees of the City and certain other public entities that are funded by, and provide services to, the residents of the City of St. Louis, such as the St. Louis Public Library, the Zoo‑Museum District, and the City Mental Health Board.

[2] In an effort to gain greater control over its pension costs, the City is currently attempting to establish by Ordinance a new Firemen’s Retirement Plan to replace the FRS.  However, this effort is currently subject to litigation and has not yet been implemented.