The Last Full Measures of Municipal Bankruptcy

October 17, 2014
Visit the project blog: The Municipal Sustainability Project

The Last Hurdle? Detroit reached an agreement early yesterday with FGIC, its largest remaining holdout creditor, which had claimed the Motor City owed it $1.1 billion. The federally facilitated agreement likely will accelerate an end to the nation’s largest municipal bankruptcy in history. The agreement was reached at 2:30 a.m. in the wake of closed-door negotiations overseen by Chief U.S. District Judge and bankruptcy mediator Gerald Rosen; but the discussions also involved Michigan Governor Rick Snyder’s adviser, Richard Baird. Syncora, another municipal bond insurer which had earlier reached an agreement with Detroit, and FGIC were two creditors who constituted the biggest outstanding holdout creditors to the city’s proposed plan for its adjustment of debts: together they had insured $1.4 billion in troubled pension debt. However, unlike the agreement reached last month with Syncora, the new agreement with FGIC settlement involving real estate must be approved by Mayor Mike Duggan and the Detroit City Council in the wake of the resolution adopted by the city last month which provided for the restoration of local control over city departments, contracts, and other day-to-day matters after 18 months under state emergency management. The settlement provides for a mix of cash and prime downtown Detroit real estate. FGIC will receive about $152 million in city notes, part of which will be backed by public parking revenue, as well as $19.7 million in credits it can apply for purchasing city parking assets or real estate. In return, FGIC, which has a $1.1 billion exposure from insuring the pension certificates of participation (COPs), will drop its objections to the city’s plan to adjust $18 billion of debt. In addition, another, smaller barrier was also removed yesterday when the city announced its settlement with the Macomb Interceptor Drainage District over a $26 million claim. The agreement could effectively end all creditor opposition to Detroit’s plan of debt adjustment—which will be updated so that an 8th, and presumably final, version will be submitted to the U.S. bankruptcy court next week, when the Motor City is scheduled to offer its closing arguments. “There wasn’t any more cash,’’ Mayor Mike Duggan said in an interview yesterday. “They made an assessment that their best chance for a return was to participate in Detroit’s redevelopment.” Nevertheless, it remains on Judge Rhodes plate to independently determine that the revised, eighth version of Detroit’s plan of debt adjustment is feasible, and his finding that the city has a reasonable likelihood of achieving its financial projections and performing its obligations.

The Deal. Yesterday’s federally mediated agreement involved FGIC’s wrapping of $1.1 billion worth of the city’s certificates of participation or COPs, which the city has sued to repudiate, claiming the debt was illegally issued by the former Kilpatrick administration—a lawsuit which will be dropped under yesterday’s agreement, although it remains uncertain whether the holders of the COPs, which include hedge funds, are parties to the agreement, with an attorney representing the COPs holders reportedly advising Judge Rhodes it was still uncertain how many would choose to opt in on the settlement. Under the agreement, Detroit would provide FGIC the opportunity to redevelop the city’s prime riverfront site which now includes the Joe Louis Arena, where the Detroit Red Wings skate, allowing FGIC to replace the arena with a 300-room hotel, condominiums, and retail, primarily to serve the neighboring convention center. The city testified in the courtroom yesterday that the proposed agreement would help redevelop a nearly nine-acre stretch of riverfront land in downtown Detroit. FGIC would get roughly $150 million in cash from two note issues floated by the city, reports said. The insurer would also receive $4 million in so-called revitalization credits and $14 million in tax increment financing district credits. Detroit emergency manager Kevyn Orr will ask the Detroit City Council to approve the deal next week. If the council rejects the plan, Mr. Orr could instead petition Michigan’ state emergency loan board for its approval. The city plans to turn in an amended confirmation plan – its eighth—reflecting the new agreement by Monday.

Taking Stock of Crime in Stockton. As the City Stockton awaits U.S. Bankruptcy Judge Christopher Klein’s decision at the end of the month with regard to approving the city’s proposed plan of debt adjustment―which would allow the city to exit municipal bankruptcy, the city faces elects just days afterwards—elections which could rechart the city’s future, notwithstanding its plan, and which will have to address public safety. Stockton Mayor Anthony Silva this week, in the aftermath of eight recent homicides, including five over the weekend in a four-hour span (there have been 45 homicides in Stockton in 2014. There were 32 in all of 2013) warned that the city’s recent crime wave is indicative of a “state of emergency,” asking citizens for “input” into the deployment of police officers. In addition, the Mayor renewed his call for voters to oust two incumbent City Council members in the upcoming elections. The crime surge occurred shortly after last week’s city announcement of the hiring of Jessica Glynn as manager of Stockton’s new Office of Violence Prevention. Mayor Silva said he is pleased the new job — which includes overseeing the city’s Operation Ceasefire anti-gang measures — has been filled, but he added that the city needs an immediate prescription in addition to a long-range cure: “As the mayor, I feel it’s my job to help protect the residents.” Stewart Wakeling of the California Partnership for Safe Communities — one of the city’s partners in Operation Ceasefire — said Tuesday he believes Stockton’s long-range approach is the right course for a sustainable improvement: “The way to deal with it is to use all the resources you can that are rooted in the evidence of what works…There are no shortcuts to this. You just have to do it. An overnight reduction is not likely to happen.” Last year’s Stockton homicide total represented a decrease of 39 from the city’s all-time high of 71 killings in 2012, a drop which Mr. Wakeling attributed to the institution of the city’s “Ceasefire” at the start of 2013, but added, “To really enhance and sustain the effort, you have to have dedicated resources…”

Charting Stockton’s Future. In addition to Council elections next month, Stockton residents will vote on Measure C, a list of proposed changes to the city’s charter, among which are:
• Remove a provision requiring the mayor be paid at least as much as the chairman of the San Joaquin County Board of Supervisors.
• Clarify and rephrase certain conflict-of-interest provisions and remove outdated language pertaining to employment qualifications.
• Remove mention of the city manager’s spending authority from the charter and provide for adoption of an administrative spending limit by ordinance.
• Render the charter silent on methods for selecting top officers in the Stockton Fire Department.

On vote-by-mail ballots in the coming weeks, and in voting booths on Nov. 4, Stockton residents will be making key decisions on three election campaigns that will determine the makeup of the City Council for the next four years. Perhaps largely unnoticed amid the campaign rhetoric is Measure C, which proposes a variety of changes to Stockton’s charter, the city’s governing document—or as the co-chairs of the citizen’s commission describe it: “Measure C is about modern, efficient government…A YES vote means progress toward modern, efficient government with policies that reflect the new direction of Stockton and drive the City toward a brighter future.” The space on the ballot that was allotted for an argument by opponents to Measure C is blank. No opposing argument was submitted. At issue for the next two years will be the current system, under which candidates in Stockton’s six geographical areas first must compete in a primary in which only their district’s residents can vote, but then must win a November city-wide election. That system has been in place since voters approved it in 1986, but it has been facing challenges for years. Twelve years ago, for instance, a group of south Stockton clergymen sought to change the system, arguing that it funnels political attention and dollars away from their community. But the effort died in the City Council. Former City Councilman Ralph Lee White, who serves on the charter review commission, has been seeking to change the system almost from the moment it was adopted, even though those who support the current system have argue there is little historical evidence that it has disenfranchised voters. Since the 1986 measure took effect, according to election records, 40 of 46 City Council candidates who won their district primaries went on to capture their races in the city-wide vote.

Trouble in River City. San Bernardino Mayor Cary Davis this week warned of new obstacles to the city’s hopes for exiting municipal bankruptcy, stating that police union claims that the city’s management “misinterpreted” a tentative agreement are untrue. Rather Mayor Davis said, it was the union seeking to change the contract under the “guise of ‘clarification,’ with the union now seeking to change the terms of the agreement and add additional burdensome costs over the life of the contract. This action took place after the agreement was approved by both sides. A deal is a deal and the fact that union leadership, through their announcement, would attempt to set aside a judicially mediated agreement and renegotiate is disturbing.” The disagreement, moreover, is not small: as City Manager Allen Parker noted: “It’s a significant difference — there’s a significant dollar sign difference over the length of the contract.” The breakdown between the city and its police union over the tentative agreement – in the wake of a filing with U.S. Bankruptcy Judge Meredith Jury that the two sides are no longer actively negotiating—is indicative of the obstacles in the path to any long-term consensus on a plan of debt adjustment that would clear the way for the city to exit from municipal bankruptcy and move forward with a sustainable fiscal future—as well as with the signal differences compared to Detroit, where the active, contributory role of Governor Rick Snyder and bipartisan leaders of the state legislature—not to mention the attuned musical ear of Judge Rhodes and unrelenting efforts of Chief U.S. Judge Gerald Rosen have put Detroit on the brink of exiting municipal bankruptcy at a far faster pace than San Bernardino. Since union president Steve Turner two weeks ago announced that the city “chose to turn its back” on a tentative agreement, city officials have mostly kept to statements that they intend to continue negotiating but cannot provide their side in detail because a federal judicial gag order covers the agreement. Moreover, as with its northern counterpart, Stockton, the issues are further exacerbated by the looming elections—here, specifically, as the campaign for and against Measure Q — which would change the city charter to set police and firefighter salaries by collective bargaining rather than as the average of 10 like-sized cities — heats up―a measure on which the union recently ended its neutral stance and began actively opposing. Or, as Mayor Davis notes: “It’s curious that the change happened at the cusp of the election.”

Is Detroit Nearing a Successful Exit from Municipal Bankruptcy?

October 16, 2014
Visit the project blog: The Municipal Sustainability Project

Hearing from the People. U.S. Bankruptcy Judge Steven Rhodes yesterday offered some 30 creditors of bankrupt Detroit who are not represented by attorneys to not only testify, but also to question witnesses as his trial to determine whether to approve Detroit’s proposed plan of debt adjustment. Nearly 40 people had filed objections with the federal court asking for permission either to testify or question witnesses, including Detroit officials. Most objections related to the proposed cuts to pensions. The testimony came ahead of closing arguments in the biggest municipal bankruptcy trial in U.S. history and offered people a final chance to convince Judge Rhodes he should dismiss, rather than approve the city’s debt-cutting and reinvestment plan. The opportunity made for some awkward, and racially charged, moments as Judge Rhodes relaxed rules and procedures normally in place for attorneys. Yesterday’s unconventional hearing permitting the individual objectors to argue against the Motor City’s restructuring plan precipitated some unexpected scenes, including one Detroit resident suddenly getting the chance to question emergency manager Kevyn Orr under oath. Wanda Jan Hill, an activist who ran for city council last year, originally asked to question Jones Day lawyer Heather Lennox about Detroit’s clawback of retirees’ annuity savings accounts; however, city attorneys sought to block the request, saying Ms. Lennox likely would be precluded from answering any questions because of her duty to keep private information shielded by attorney-client privileges and a gag order on the case’s mediation talks. Nevertheless, under questioning by Ms. Hill, Ms. Lennox acknowledged that Emergency Manager Kevyn Orr did not warn retirees in key documents that, under the city’s plan, they would be mandated to pay interest on monies clawed back from a savings plan that overpaid some workers. Ms. Hill told Judge Rhodes that had retirees known, they might have voted against, rather than for Mr. Orr’s proposed plan of debt adjustment. That led Judge Rhodes to ask Kevyn Orr, who was present in the courtroom, to respond—prodding him to be specific by telling him: “I think what Ms. Hill is trying to get here is whether or not any of the city’s filed documents disclose the 6.75% interest rate associated with the clawback.” Nevertheless, even with the Judge’s efforts to obtain a specific answer, no such response was forthcoming. Under the plan, general city employees will see their monthly retirement pay reduced by 4.5 percent and will lose their COLAs. Police and firefighters will get their full pensions, but have their COLAs cut in half. The cuts would affect about 30,000 active employees and retirees. Retirees who contributed money to an optional annuity savings fund will have to return overpayments they received from the program, plus 6.75 percent in interest. The annuity program paid employees a guaranteed interest rate regardless of how the fund’s assets performed. The city argued that workers were overpaid in many years. Those cuts, plus changes to retiree health benefits, mean retirees are projected to receive only about 60 percent of what they were promised, according to the city. Walter Gary Knoll, a retired city chemist, testified he will have to repay $42,000 because of the clawback, even though, as he told Judge Rhodes, “I engaged in no fraud or deceit in the annuity.” Others who testified yesterday included former Detroit Councilwoman JoAnn Watson, and Motor City resident Fredia Butler, whom Judge Rhodes allowed to wear a big black floppy hat while testifying. Ms. Butler told Judge Rhodes the city’s bankruptcy case was a “power grab,” and Michigan Governor Rick Snyder the city’s “master,” while decrying the loss of local control since the Governor’s appointment last year of Kevyn Orr as Emergency Manager. She told Judge Rhodes she was “praying for justice.”

A Final Bankruptcy Agreement? Attorneys for Detroit and Financial Guaranty Insurance Co. yesterday advised Judge Rhodes they plan to present a proposed settlement which could resolve FGIC’s objection to Detroit’s plan of debt adjustment in court today—in effect removing the last major stumbling block to Detroit’s exit from municipal bankruptcy. The city and FGIC have participated in closed-door, federally overseen mediation talks for weeks in an attempt to reach such an agreement. Thomas Cullen, a Jones Day attorney representing Detroit, advised Judge Rhodes that the city has a “firm and active faith” that a settlement with FGIC would be finalized by today, perhaps clearing the way for Judge Rhodes to find that Detroit’s modified plan of debt adjustment meets the federal test of being fair, feasible, and in the best interests of its thousands and thousands of creditors. Should such an agreement be offered to the federal court today, it would leave only a small number of financial creditors and individuals objecting to the Motor City’s modified plan of debt adjustment. FGIC has been working behind closed doors under the prodding of U.S. Judge Gerard Rosen to settle FGIC’s $1.1 billion claim stemming from a disastrous pension deal backed by ex- and now imprisoned former Detroit Mayor Kwame Kilpatrick. A settlement would let FGIC recover more money than under the current, seventh version of Detroit’s proposed plan of adjustment, but less than what rival bond insurer Syncora Guarantee Inc. received in its agreement with the city last month. Syncora and FGIC were two of the biggest objectors in the bankruptcy trial: together, the two had insured $1.4 billion in troubled pension debt that helped former Mayor Kilpatrick prop up the city’s pension funds in 2005. Under the current, pending plan of debt adjustment before the federal bankruptcy court, Detroit proposes paying FGIC as little as 6 cents on the dollar. Under Syncora’s agreement—incorporated in the pending plan, the bond insurer would receive nearly 14 percent recovery on claims totaling $400 million. If the two parties are able to present their potential agreement to the federal court today, Judge Rhodes could schedule closing arguments in the historic trial for next week.

Protecting the Motor City’s Future. To choke the flow of police officers leaving Detroit for other cities, City Council President Brenda Jones yesterday said she was considering the potential adoption of an ordinance that would force departing police officers to reimburse the city for their training costs—a reimbursement which could amount to thousands of dollars per officer. Councilmember Jones told her colleagues that it was “ridiculous to lose officers we’ve trained — and spent money on training — to another city.” Councilmember Jones announced her proposal in the wake of Detroit Police Chief James Craig’s description during yesterday’s council meeting of his department’s struggle to keep officers working in Detroit. Chief Craig said uncertainty created by Detroit’s municipal bankruptcy and concerns over the competitiveness of the city’s compensation appeared to be at the root of many of the departures, telling the Council Detroit was losing 20-25 police officers per month when the drain was at its worst. He warned that big cities, such as Houston and Atlanta, have sent recruitment teams to Detroit, while other officers had decamped to local suburbs or joined Wayne State University’s police force. Council President Jones did not define the duration over which a Detroit officer would have to remain in Detroit to avoid the potential financial penalty, nor did she say how much it costs the city to train a police officer, but a police department representative told Council the training fee had been about $5,500 in the past, telling the Councilmembers: “What’s driving many officers to leave, candidly, is uncertainty about the future, pay.” The Detroit Police Department has about 1,800 police officers and about 1,000 civilian workers—and is focused on getting as many of its members as possible on the street fighting crime. Chief Craig said that despite losing officers, his department had succeeded in reducing overall crime in Detroit, telling them that overall crime in Detroit is down 17% and homicides are down 14%.

Russian Roulette? Even as the Garden State is focusing on ensuring the fiscal viability of Newark, there are growing concerns about the potential solvency of Atlantic City. Thus it appears efforts are underway to seek state intervention—and fiscal aid—to saving Atlantic City’s Trump Taj Mahal casino and its almost 3,000 jobs. Trump Entertainment Resorts Inc., the bankrupt casino operator which owns the Taj Mahal, has turned to state officials after Atlantic City elected leaders rejected the gambling center’s efforts to be given $175 million in property tax abatements. At a corporate federal bankruptcy hearing yesterday, a Trump Entertainment advisor testified Trump Entertainment has said it may close its remaining casino next month without tax relief and labor concessions. (Mr. Trump’s estimated wealth as of last March was $3.9 billion.) Having failed to secure a bailout by the city, the city, the casino is now asking Jon Hanson, Chairman of the New Jersey Gaming, Sports, and Entertainment Advisory Commission, to put together a bailout package of state funds to keep the casino open.

What Constitutes Fair & Equitable in Municipal Bankruptcy?

October 15, 2014

Visit the project blog: The Municipal Sustainability Project 

Is Detroit Contagious? Despite some apprehensions that Detroit’s bankruptcy might be contagious to other municipalities in Michigan, the Center for Local, State, and Urban Policy at the University of Michigan reports that an increasing percentage of municipalities (36%) report they are better able to meet their fiscal needs this year—and that improving fiscal health of municipalities is reported by jurisdictions of all sizes across the state. According to the report, this marks the first time in the Michigan Public Policy Survey’ studies that Michigan’s local governments have reported they are better able to meet their fiscal needs this year than the previous year. The report found the improvement to be broad—with improvement reported by jurisdictions of all sizes, with the exception, however, of municipalities with populations between 10,000 to 30,000, where less fiscal gains (42%) were reported than last year (48%). Overall, nearly 25% or 440 local governments reported declining fiscal health. The majority of municipalities reported two key areas of improvement: property tax revenues and state aid. Tom Ivacko, the Center’s Director and a co-author of the report, notes that the improvements constitute “a slow trend, [which] still leaves more than 400 jurisdictions here in fiscal decline.” This year’s survey does mark a continuing, overall improvement: from the surveys’ earlier years as Michigan’s 1,856 cities, townships and counties struggled with the effect of the national recession and the state’s grim recession. The study reported steep declines in local finances in 2009 and 2010, followed by a general trend of improvement through 2012—a trend which has continued, according to the report, but at a decelerating pace; nevertheless, the report found that for the first time since the report was initiated, more local governments have passed a “tipping point” of fiscal health, with 36% of jurisdictions saying they are better able to meet their fiscal needs this year compared to 24% who said they are less able to do so. According to the report, the municipalities reporting distress are:

  • more likely to have experienced cuts in property taxes and state and federal aid,
  • more likely to have taken on debt,
  • more likely to report growing employee health care costs and increased infrastructure needs,
  • a majority — 56% — are still facing falling property tax revenues.

According to the report, 36% are seeing an increase in property tax revenue, up from 8% in 2010. Another 38% of local governments said they continue to see a decrease, compared to 78% that saw decreasing property taxes in 2010. Part of the story of improving finances, according to the report, is the result of local governments reducing wages and services—leaving them less fiscally able to withstand another serious recession, but better equipped if the economy continues to improve.


A Final Bankruptcy Agreement? Detroit attorneys hope to present an agreement between the Motor City and its last remaining holdout creditor, FGIC, or the Financial Guaranty Insurance Co., tomorrow in court before U.S. Bankruptcy Judge Steven Rhodes. Thomas Cullen, a Jones Day attorney representing Detroit in its historic bankruptcy case, testified yesterday in court that the Motor City had a “firm and active faith” that such an agreement would be completed by then. Counselor Cullen’s testimony came in the wake of closed door sessions in New York City under the aegis of U.S. Judge Gerald Rosen, as FGIC attorney, Alfredo Perez, told the court that the NYC overseen negotiations had permitted the parties to “make a lot of progress.” Judge Rhodes then granted FGIC’s request to hold off on bringing in its witnesses until tomorrow. The status update before Judge Rhodes came as the parties prepare to call witnesses prior to the trial’s closing arguments, which are expected as early as next week. The NYC discussions have been with regard to addressing FGIC’s claim on some $1.1 billion, stemming from a disastrous pension deal backed by former—and now convicted and imprisoned―ex-Mayor Kwame Kilpatrick. The closed door, federally overseen private negotiations are intended to accelerate an end to the nation’s largest municipal bankruptcy. In response to the potential agreement, Judge Rhodes yesterday inquired if an agreement with FGIC would require “yet another round of projections,” to which Mr. Cullen responded no. The Detroit News reported last week that the city was considering leasing most of Detroit’s public parking facilities to bond insurers — including the Joe Louis Arena garage and one underneath the old Hudson’s site along Woodward — as part of these key settlement negotiations, under which FGIC could end up leasing three parking garages, receive riverfront land, and cash. FGIC could also sign an agreement to develop city-owned land. Under the emerging outlines of the potential settlement, FGIC would recover more than under the Motor City’s pending plan of debt adjustment before the federal court, but less than what rival bond insurer Syncora Guarantee Inc. received under its court-approved settlement last month. Syncora and FGIC were two of the largest holdout creditors that have been obstacles to Detroit’s emergence from municipal bankruptcy. The firms insured $1.4 billion in troubled pension debt which were key to the sordid deals under now-convicted former Mayor Kwame Kilpatrick’s reign that were used to prop up Detroit’s pension funds in 2005. Under Detroit’s pending plan of debt adjustment before the federal bankruptcy court, the Motor City has proposed paying FGIC as little as 6 cents on the dollar. Under the emerging settlement offer, FGIC could receive nearly 14 cents on the dollar, or a total of $400 million. In comparison, the plan proposes 46 cents on the dollar for Detroit’s retirees on their $3.1 billion claim. FGIC has argued before Judge Rhodes that the city’s proposed debt adjustment plan violates the U.S. Bankruptcy Code, because it proposes paying some creditors more than others (please note immediately below). If FGIC settles, Detroit’s last potential hurdle could come from a regional water district which is suing over a botched project and a handful of former city employees and residents who are not represented by lawyers.

Let the Hearings Continue.  With the closed door negotiations between Detroit and FGIC behind closed doors, Detroit’s historic bankruptcy case continued yesterday with Judge Rhodes taking testimony from others opposed to Detroit’s current proposed plan of debt adjustment. William Fornia, a pension consultant, challenged the claim under the city’s pending plan of adjustment that Detroit retirees would recover 60 percent or less of what they are owed, telling the court the city’s calculation flawed. Mr. Fornia testified pensioners are more likely to recover about 75 percent. According to FGIC and many of the city’s municipal bondholders, such a recovery for retirees should be rejected by the federal court, because of its significant inequity—with thee gross disproportionate recovery proposed of only about 11% for the city’s municipal bondholders versus  75% for its pensioners. Today the case, In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan, is scheduled to resume with witnesses who oppose the Motor City’s pending plan of debt adjustment, but who are not represented by attorneys.


Conditional Approval. The New Jersey Local Finance Board officials has approved Newark Mayor Ras Baraka’s budget for this calendar year, although the director of the state’s local government-services division warned that the FY2015 fiscal gap may be as yawning as $60 million. The Board has ordered $1.3 million of cuts to benefits, salaries, and other expenses from the $815 million budget that the Newark City Council approved last week. The Local Finance Board’s unanimous vote was the last step needed for adoption of Newark’s budget—a key step in the wake of the $93 million deficit Mayor Baraka inherited when he took office last July―a gap which Finance Board Chairman Thomas Neff noted was the “largest structural imbalance—probably in the state,” adding that if there were no appreciation of the problem, the city would not take the necessary steps to act. The Local Finance Board, which oversees municipal finances in the state, voted last week to supervise Newark’s finances as a requirement of Mayor Baraka’s plan to spread out a $30 million deficit from 2013 over the next decade—a budget which now includes $10 million of state transitional aid. Most of the board’s cuts, $1 million, are for health care. The city has failed to collect higher benefit contributions since Governor

Chris Christie signed a 2011 law requiring public workers to pay as much as 35% of the cost of their premiums, up from a flat 1.5 percent of salary, according to Chairman Neff.

Not a Georgia Peach. A Georgia businessman accused of bribing former Detroit Mayor Kwame Kilpatrick and several Motor City pension fund officials accepted a plea agreement minutes before standing trial yesterday in federal court. Under the agreement, the businessman, Roy Dixon, will enter a guilty plea at 2 p.m. to conspiracy to commit honest services mail and wire fraud―the same federal statute under which former Virginia Governor Robert McDonnell and his wife were convicted earlier this year―a 20-year felony that also carries a $250,000 fine. Mr. Dixon was one of four people charged with looting Detroit’s pension funds along with former Mayor Kilpatrick’s fraternity brother Jeffrey Beasley and three others. Mr. Dixon was charged with embezzling more than $3 million with the help of former Detroit Lions wide receiver Mike Farr and spending some of the cash on an $8.5 million mansion in Atlanta, making him the third person to plead guilty to a federal crime in the corruption case and the latest during a years-long corruption probe that has, to date, netted 35 convictions. It was not immediately clear whether Mr. Dixon agreed as part of his deal with federal prosecutors to cooperate or if he will testify against his former co-defendants during a trial that will resume tomorrow. The other two guilty pleas in the pension fund case came from former City Council aide George Stanton and businessman Chauncey Mayfield, who are awaiting sentencing and expected to testify during the Mr. Beasley’s trial. The underlying accusation against Mr. Dixon had alleged that he paid bribes and kickbacks to former Mayor Kilpatrick, Mr. Beasley, three pension fund trustees, and a municipal official—with the charge that he paid the bribes to secure investment money from the pension funds, according to prosecutors—with the money for those investments made available in the wake of the former Mayor’s backing for a controversial Wall Street deal that started injecting $1.4 billion into the city’s pension funds in 2005. In 2006, months after the Detroit City Council approved that deal, Mr. Dixon formed the private-equity firm Onyx Capital Advisers, which was based in Detroit—with the new firm seeking to act as a private equity firm which would invest Motor City pension fund money in a real estate deal in the Turks and Caicos Islands and a Georgia company that sold automobiles to people with bad credit. That company, mayhap appropriately named Georgia-based Second Chance Motors, was owned by Mike Farr, a former NFL Detroit Lions player, whose father was ex-Lion Mel Farr Sr., the “superstar,” Detroit-area auto dealer who pitched cars in commercials while wearing a red cape and pretending to fly. By June 2007, the Detroit pension funds and one in the city of Pontiac had agreed to invest $25 million in Onyx. That was exactly one year after Detroit received the final infusion from Mr. Kilpatrick’s Wall Street deal. To secure the investment, prosecutors allege Mr. Dixon paid bribes and kickbacks to Messieurs Kilpatrick, Beasley, three other pension trustees, as well as others. In addition, Mr. Dixon and an unnamed business partner allegedly contributed $45,000 to Mr. Kilpatrick’s nonprofit, the Kilpatrick Civic Fund. In court documents, Mr. Dixon testified that Mr. Beasley and other pension officials extorted money and gifts from him — a claim likely to be repeated if he testifies during the trial. The indictment and a probe by the U.S. Securities and Exchange Commission (SEC) allege Mr. Dixon fueled a lavish lifestyle with money loaned on behalf of Detroit’s retirees. By 2008, Mr. Dixon was financing the construction of a stone mansion in Atlanta. The FBI and SEC analyzed bank and financial records and alleged that he arranged for Mr. Farr to pay three construction companies $521,000 in pension fund cash, according to prosecutors. The investment in the 2.5 acre plot was for a seven bedroom mansion with a mere ten bathrooms, a pool, and an exercise room, library, and four fireplaces—a former home, I should write, as it was headed for foreclosure last year. By the time of his indictment last year, federal prosecutors said the Detroit pension funds had lost the entire $20 million investment in Onyx; Pontiac’s public pension fund had lost $3.8 million. The current pension fund corruption trial is the first major public corruption case since former Mayor Kilpatrick was convicted and sentenced last year to 28 years in federal prison. This one which involves the Motor City’s former Treasurer and Mr. Kilpatrick’s former fraternity brother , as well three others who either worked for Detroit’s pension funds or received millions in pension loans. Meanwhile, Mr. Kilpatrick is an unindicted co-conspirator in a complex criminal case that will attempt to explain what happened to money from a $1.4 billion Wall Street deal blamed for helping plunge Detroit into bankruptcy, with federal prosecutors alleging the funds lined the former Mayor’s pockets in a federal trial that spans 2006 through April 2009 and alleges pension fund corruption cheated retirees out of more than $84 million. That amount must be considered in addition to the money-losing Wall Street deal Kilpatrick backed. Federal prosecutors allege city pension officials started approving a series of corrupt investments with businessmen in January 2006, six months after the Wall Street deal. Flush with cash, pension fund trustees loaned more than $200 million to businessmen accused of paying bribes and kickbacks, according to federal prosecutors. Kilpatrick is an unindicted co-conspirator because Beasley, 45, of Chicago, allegedly pressured people to contribute money to the ex-mayor’s nonprofit group in order to get pension fund loans. The defendants deny being influenced by perks that allegedly flowed during business dealings and trips to Las Vegas, England and the Caribbean. The four defendants are Beasley, Dixon and two former pension officials: trustee and former vice president of the Detroit Police Officers Association Paul Stewart and Ronald Zajac, 70, of Northville, former top lawyer for two municipal pension funds.



The Challenges of Municipal Governance

October 14, 2014
Visit the project blog: The Municipal Sustainability Project

Corporate Governance. One of our most perspicacious readers with wisdom and insight far beyond my pithy reach wrote yesterday with a pertinent insight―especially given the recent actions taken by the Detroit Institute of Arts or in comparison to the major auto company bankruptcies in Detroit: whether in Newark (please see below), Detroit, or San Bernardino; an especially distinguishing characteristic of municipal versus private corporate bankruptcy relates to governance—and, in the case of municipalities, not only the difference between presumably trained corporate leaders versus elected municipal leaders, but also the frequency with which, in municipal bankruptcies, voters change who the elected officials are. Moreover, the process can be different, so that, for instance, in Central Falls, Rhode Island, and Detroit; the respective states of Rhode Island and Michigan appointed emergency managers to steer the two municipalities through the adjustment process and to new elected leaders; but neither Alabama, for Jefferson County, nor California for Vallejo, Stockton, or San Bernardino made any such appointments; rather the elected officials have continued to oversee their respective cities and processes—and changed in intervening elections. It is almost incomprehensible to comprehend how difficult such elected leadership could be—all made immeasurable more challenging by the changes in elected officials in the middle of a bankruptcy – certain negotiated items had to be done all over again. U.S. Bankruptcy Judge Thomas Bennett, at the Bankruptcy and Beyond Widener Law School forum in Harrisburg commented that the one party not represented in a municipal bankruptcy was the taxpayer – because, of course, the federal statute contains no such delineated role. But as we can see from the above, in fact municipal taxpayers have been represented—sometimes better, sometimes not so. The diversity of experiences we are now learning from will―hopefully―be of inestimable value to state and local leaders as we ponder on lessons learned.

Making do & Improvising. As the clock is winding down in U.S. Bankruptcy Judge Steven Rhodes’ trial to determine whether he will approve or reject the Motor City’s pending plan of debt adjustment—or whether his colleague U.S. Judge Gerard Rosen will succeed in obtaining a resolution with Detroit’s sole remaining significant creditor FGIC—one of the most critical decisions Judge Rhodes would be required to reach would be whether the plan cobbled together by emergency manager Kevyn Orr provides for a sustainable fiscal future. It’s not as if there is a rule book or guide—albeit two wizards at the Boston Federal Reserve have given us some equations and the ever so thoughtful Chris McKenzie of the California League of Cities has been seeking to translate those into municipal governance; nevertheless, cities, even in bankruptcy—have to work. Unlike dissolution for a non-municipal corporation, that is not an option for a city, county, or town. In effect, the need for revenue for the future is central to Detroit’s bankruptcy case. By law, the city is required to prove that it has a viable plan to improve services and avoid insolvency. That means Judge Rhodes will need to find certainty that the plan will secure or guarantee sufficient resources which could fix many broken things. That plan—or at least the current version pending before the federal court, calls for shedding $7 billion in debt and spending $1.5 billion on city improvements over the next decade, leaving to the city the challenge to convince Judge Rhodes that the plan is fair, feasible, and can be implemented. Thus, in the very fine coverage by both the Detroit Free Press and Detroit News, we have been able to spectate at the innovation hard times can create as presented by witnesses in Detroit’s bankruptcy trial, who have testified about what they term a “troubling yet tolerated way of life, where things can’t get fixed correctly — or fixed at all — because there’s not enough money, forcing residents to find creative solutions to get by.” Among the examples: Missing manhole covers and sewer grates get plugged with tires, or covered by boards and the fire department utilizing pop top soft drink cans as emergency alerts because Detroit simply has no modern-day alert system. Behind all the headlines, progress, by hook and crook, has been taking place. According to Mayor Mike Duggan’s office, in the last nine months alone:
• an average of 1,000 new streetlights are going up each week; blighted homes are coming down at record pace — 250 per week, compared with 50 a week historically;
• 250 city parks have been maintained, compared with 25 last year;
• the city is getting 50 new buses thanks to a new federal grant, and
• overall crime is down 7%.

Detroit’s municipal bankruptcy team reports its post-bankruptcy plan includes spending $500 million on blight removal, $150 million for the police department, and $80 million for the fire department.

But it’s little things that we do not always think about that present such unique challenges. For instance, over the last 18 months, five people have been found in manholes, three of them dead. Two of those victims were looking for metal; one was searching for his dropped keys. According to the Detroit Water and Sewerage Department (DWSD), since the beginning of this year, the Motor City has replaced or repaired 302 manhole and sewer covers, and still has 42 to replace. It has 180,000 covers total, of which 5% get replaced or repaired every year. DWSD has set a goal of replacing missing manhole covers within 24 hours of learning about them, but even that goal is challenging, with a spokesperson noting; “Sometimes, we replace manhole covers and they are stolen again, or we haven’t gotten another call about the manhole being missing.”

In a practice I know would draw concern from Arlington County Fire Chief Jim Schwartz, the Detroit Fire Department has, nevertheless, displayed critical creativity. Because the fire department has no modern-day emergency alert system, its firefighters make their own, with, according to reports, one popular method involving a pop can. Personnel fill it with coins or screws, and then place it on a fax machine. When a fax comes through, the paper knocks over the can. The noise alerts the on-call firefighter, who then rings the fire bell to wake everyone up. (The Free Press confirmed this technique and showed how it works in a video, which was featured on Comedy Central’s “The Colbert Report.”)

The Unfine Art of Municipal Bankruptcy. In the wake of seemingly unprecedented compensation increases for senior leaders of the Detroit Institute of Arts—the previously Detroit-owned Institute which Governor Rick Snyder and bipartisan state legislative leaders converted to an independent foundation to both retain its world-class location in Detroit, but also to leverage financing to ensure no Detroit retiree would fall below the federal poverty level, together with foundations, packaged one of the most artistic developments that became the fulcrum to the innovative state/foundation role in constructing Detroit’s pending plan of debt adjustment before the U.S. Bankruptcy court. But yesterday, in the wake of significant wage increases and bonuses ($50,000) to the Institute’s Director and executive vice president and COO—on top of 13% compensation increases to salaries in excess of $500,000 for the Director and nearly $400,000 for the COO; Michigan state representative Eileen Kowall and an Oakland County commissioner urged DIA officials to immediately reconsider the double-digit compensation increases, calling them a misuse of taxpayer funding. Rep. Kowall, who does not represent Detroit, but spearheaded a seven-bill legislative package that ensured the DIA and Detroit Zoo received 100 percent of their millage funding paid by taxpayers, reported she is asking the DIA’s board of directors to reconsider the pay boosts so tax dollars sent to the museum via a regional millage approved by voters in Oakland, Wayne, and Macomb counties go where they are supposed to — for museum operations. Rep. Kowall noted; “Given the DIA’s very public part in Detroit’s recent bankruptcy case, I was shocked to see such drastic raises being given out on our taxpayers’ dime I have worked hard to protect local taxpayers, and this is money that should have gone toward protecting the city’s art, not lining the pockets of top officials at the DIA.” The timing could hardly be worse: it was just two years ago that voters in Macomb, Oakland, and Wayne counties approved a $23 million millage to fund DIA operations for 10 years, leading Rep. Kowall to add: “As Detroit faced bankruptcy and the very real possibility some of our art would be auctioned off to help pay off the city’s debts, top officials at the DIA quietly took a larger paycheck and hoped no one would notice in the midst of this turmoil…As our state, its taxpayers and pensioners, and other groups banded together to protect Detroit’s art, these DIA officials accepted pay raises higher than many local employees’ annual salaries. Oakland County Commissioner Dave Woodward told the Detroit Free Press he has spoken with DIA leadership and asked them to act quickly to reduce the excessive compensation increases. If they do not, Commissioner Woodward said, he would take steps to dissolve the Oakland County Arts Authority that collects the voter approved $11 million annually for the DIA, indicating he has already commenced drafting a resolution, which, he reports, he will introduce at the next regular scheduled Oakland County Board of Commissioners Meeting, where he said he would request an immediate vote.

The Power of Oversight. Moody’s has determined that New Jersey’s active oversight of Newark, the Garden State’s largest city, based upon the New Jersey Local Finance Board’s decision we reported on last week, is a credit positive—with oversight denoting the Local Finance Board will oversee the city’s staffing and fiscal decisions, including firings, renegotiation with the city’s unions, imposing greater benefit contributions from municipal employees, and budget decisions. Indeed, the Board is scheduled to vote tomorrow on whether or not to accept Mayor Ras Baraka’s full $815 million budget for this fiscal year. In his report yesterday, Moody analyst Josellyn Yousef wrote: “By adopting budgets in the last quarter of the fiscal year, the city misses the time frame for proactive budgetary planning…It also threatens property-tax collections and their cash balances because fourth-quarter property-tax bills cannot be sent out unless the city has passed a budget.’’ For the new Mayor, who only took office in the last quarter, it promises to be a rude beginning. Moody’s lowered Newark’s credit rating in May to Baa1 on almost $575 million of general-obligation debt, citing depleted reserves and budget gaps. Nevertheless, the early state intervention stands in stark contrast to states such as California and Alabama where, if anything, state actions contributed to and exacerbated the municipal bankruptcies of Jefferson County, Stockton, and San Bernardino.

The Complexities of Federalism in Municipal Distress

Columbus Day, 2014
Visit the project blog: The Municipal Sustainability Project

Invoking State Oversight & Federalism. Jefferson County filed a motion last Friday to appeal a ruling by U.S. District Judge Sharon Blackburn which could undermine a critical provision of the County’s plan of debt adjustment approved by the U.S. Bankruptcy Court last November which provided that the court could enforce sewer rate increases. The county is raising issues which go to the heart of federalism—especially with regard to which level of government―and branch―has authority to make fundamental revenue decisions. Judge Blackburn’s decision permitting an appeal could threaten the security of investors who purchased $1.8 billion of 40-year refunding sewer warrants last December. Under Jefferson County’s plan, if Judge Blackburn agrees to certify her ruling, Jefferson County will immediately file an appeal with the 11th U.S. Circuit Court of Appeals, with Jefferson County Commissioners David Carrington and Jimmie Stephens stating: “The county’s appeal would challenge the power of the district court to invalidate the portion of the plan of adjustment under which the bankruptcy court retains jurisdiction to enforce the county’s compliance with its sewer rate covenant throughout the term of the new sewer warrants…Regardless of the outcome of the county’s request to appeal last week’s ruling, and regardless of any ultimate ruling on the merits of the appeal before the district court, we fully intend to comply with the obligations undertaken by the county when it issued the new sewer warrants, including the rate structure that was adopted by the County Commission.” Judge Blackburn’s actions arose in the wake of a series of motions that were filed in as part of three appeals to Jefferson County’s approved plan of debt adjustment which U.S. Bankruptcy Judge Thomas Bennett had approved by a group of local residents and elected officials who are ratepayers of Jefferson County’s sewer system, with one appeal challenging Judge Bennett’s confirmation order (of Jefferson County’s plan of adjustment) and claiming the ability of the federal court to retain jurisdiction over sewer rates is unconstitutional—a claim the county sought to dismiss, but which Judge Blackburn denied, noting, in her ruling, that Jefferson County had already issued new sewer warrants to retire the outstanding debt, and that some parts of the bankruptcy plan “may be impossible to reverse.” Nevertheless, she said she would consider the constitutionality of the plan that cedes the county’s future authority to set sewer rates to the bankruptcy court. In its motion, Jefferson County argued that no federal court can strike down a provision of a Chapter 9 plan of adjustment or a confirmation order “without the debtor’s consent.”

The Sharing Economy. Mayhap ironically water and sewer authority are a fundamental part of Detroit’s proposed plan of debt adjustment—and now on Friday Moody’s has weighed in affirming its view that the regional authority takeover of Detroit’s Water and Sewerage Department (DSWD) should be a positive for holders of existing DWSD debt in the wake of the Motor City’s and its adjacent three counties’ approval of the Great Lakes Regional Water Authority, writing: “The regional authority may result in greater legal separation from the city, a positive for existing creditors of DWSD because the authority may potentially isolate creditors from the risk of a future bankruptcy filing by the city.” Moreover, Moody’s analyst wrote that the credit rating agency expects no major changes in operations and that the new authority would not impact the credit of Macomb, Wayne, or Oakland Counties. Nevertheless, according to Moody’s, the new authority will have some exposure to Detroit’s credit weakness, because the Motor City is expected to become its largest wholesale customer. Indeed, in a related development, Motor City Mayor Mike Duggan issued a statement praising his neighboring jurisdictions for their approval of the deal: “Forty years of division over control of our regional water and sewer system has ended…The fact that the legislative bodies of the City of Detroit and all three counties have approved the creation of the Great Lakes Regional Water Authority shows the new sense of cooperation and partnership that exists between our city and its suburban neighbors.” The new authority will be run by a six-member board made up of two Detroit mayoral appointees, one appointee from each county, and one appointee of the Governor, with key decisions on issues such as contracts or future privatization necessitating five out of six votes.

The Costs & Challenges of Fiscal Deficits

October 10, 2014
Visit the project blog: The Municipal Sustainability Project

Invoking State Oversight. The New Jersey Local Finance Board has voted unanimously to place Newark’s finances under state supervision as part of Mayor Ras Baraka’s plan to close a $93 million deficit. The vote will permit the Garden State’s largest city to spread out $30 million of last year’s deficit over a decade. In addition, the Mayor will be cutting expenses such as travel, stationery, and software, as well as reducing the city’s payment into a state fund which administers public workers’ unemployment benefits. The action came in the wake of this week’s unanimous vote by the City Council to approve Mayor Baraka’s proposed $815 million budget, which also includes $10 million of state transitional aid. Mayor Baraka, speaking of the state action, said the oversight agreement was reached together by both the state and city in what he termed “amicable” efforts—with the fine print still to be completed: “It’s a partnership – we filed jointly…It’s the law. We had to get permission to spread the debt out. The law says if you do that, the state needs to come in and supervise that.’’ The Mayor stated that the state oversight could range from keeping an eye on Newark’s finances to state control over hiring and employees, as well as contracts. In a second vote by the Board yesterday, it authorized Newark to borrow $8.42 million to cover payments to residents who appeal their tax assessments. Newark will redirect $5 million from its housing authority to help settle debt as part of Mayor Baraka’s plan to close the municipality’s deficit without firing city employees. Funds held by the Newark Housing Authority will cover two principal and interest payments on city obligations.

Revenue Erosion? Fiscally challenged Puerto Rico’s revenues were 2% below projections for the first quarter of the fiscal year, Puerto Rico’s Treasury reported yesterday—but the projections were 4.4% above revenues over the comparable quarter last year—with the shortfall caused by a $27 million gap between actual and projected corporation revenues, $16 million less than expected in foreign corporation (Act 154) revenues, and $10 million less than anticipated for taxes on off-shore shipments of rum. Puerto Rico Treasury Secretary Melba Acosta Febo said the rum shortfall was because the reimbursement rate per gallon of rum had declined to $10.50 from $13.25 last year, noting: “It is expected that during this fiscal year, as in previous years, a tax extender will be approved retroactively and this excise tax reimbursement will be $13.25 per gallon.” In the first quarter the biggest exceedances compared with projections were foreign tax revenue, by $43 million and the “other” category, by $32 million. The biggest shortfalls compared to projections were corporation taxes by $33 million and individual income taxes by $26 million. In contrast, the island’s sales and use tax collections were $116 million, the highest for September since the tax was implemented in November of 2006. The commonwealth last year raised the rate to 6% from 5.5% last year at this point. After adjusting for the rate increase, the sales and use tax collections still went up by 8.7% from September 2013. The revenue numbers came in as Puerto Rico went to the market for the first time since it did its debt restructuring last June with the issuance of at least $620 million of notes by Puerto Rico’s Government Development Bank, including $560 million of tax-exempt municipal bonds due in June of 2015, priced to yield 7.75%―a steep borrowing cost―especially when compared to 13-month notes the territory issued in 2011 with a yield then of 1%. Like severely distressed municipalities on the mainland, the municipal market has extracted a significant toll—with its securities trading at distressed levels for about a year as the market remains apprehensive the commonwealth and its public agencies will be unable to repay $73 billion of obligations. An index that tracks the commonwealth’s economic activity has shrunk by nearly 20% since July 2006, according to the bank GDB, which handles the territory’s capital-markets transactions. Puerto Rico has not issued long-term debt since last March, when it issued $3.5 billion of 20-year GO bonds at an 8.73% yield.

The Architecture of Detroit’s Future. A stalled, but controversial jail project in downtown Detroit may be revived after neighboring Wayne County yesterday gave preliminary approval to restart construction for the project which has already cost $157 million—notwithstanding the opposition from billionaire and Motor City civic booster Dan Gilbert, founder and chairman of Quicken Loans Inc. based in downtown Detroit. The jail would replace two facilities nearby, but Mr. Gilbert has expressed concern the facility would impede revitalization of Detroit’s entertainment district. Nevertheless, Wayne County Commissioner Kevin McNamara said the project had come too far to turn back, and Commissioners voted 9-2 to keep going—with a final vote scheduled for next week. The project, on which $157 million has already been invested, was suspended a year ago last June, the same month Detroit filed for federal municipal bankruptcy protection, after a county report determined that the project would run $91 million over planned cost. The state has offered a former prison nine miles away in Detroit for a $1 annual lease as an alternative; however, with their vote this week, the commission effectively rejected that offer. The downtown project’s cost overruns had prompted a grand-jury investigation that ended in September with the indictment of three current and former county employees on charges of neglect of duty. Commissioners have indicated that the options would cost either $468 million or $488 million in new construction, depending on the size of the jail it chooses, and Wayne County could need to issue about $400 million of new municipal bonds in addition to its current correctional facilities related debt load, which includes $200 million of bonds sold in 2010 to fund the Gratiot jail. Commissioner Kevin McNamara said the project has come too far to turn back, reporting that “A judicial complex makes sense for a downtown area…You can’t walk away from $157 million.” Construction was suspended in June 2013 after a county report that the project would run $91 million over planned cost. The downtown project’s cost overruns had prompted a grand-jury investigation which culminated in September with the indictment of three current and former county employees on charges of neglect of duty. Yesterday’s vote appeared to end Mr. Gilbert’s efforts for an alternate plan: he had offered to buy land around the downtown site for $50 million and lead efforts to redevelop it with a hotel, housing, and retail space. (Mr. Gilbert owns 60 buildings in the downtown area, including nearby Greektown Casino-Hotel and parking structure.) Gilbert’s Rock Ventures, in a statement following yesterday’s vote, said: “Detroit has made some very short-sighted important decisions that have caused negative repercussions and cut off untold opportunity for many decades.” The statement referenced the building of the city’s three casinos in three different locations, locating the Renaissance Center on the waterfront and building a one-way people mover. “Critical decisions like the location of the jail cannot be measured solely by numbers on today’s spreadsheets…They must be measured through the prism of what opportunity, vision, and ultimate value would be created in an alternative scenario.” Nevertheless, as the saying goes, it might not be over until it’s over: Matt Cullen, president and CEO of Rock Ventures, told Crain’s doesn’t think the conversation about redeveloping at least the jail site is over. “We really think the discussion is just starting,” Cullen said Thursday in an interview with Crain’s: “We formally believe there’s a solution that accommodates everyone. The committee, today, acknowledged the key stakeholders were not at the table.” Cullen said Wayne County justice officials are now engaging the process to find the best solution for the site – whether that includes finishing the jail site at Gratiot, rehabbing the current jail near the site, or moving the jail elsewhere. “That site is compelling enough, as a gateway to Detroit, to make a very compelling investment and do something else with the jail.”

The Intergovernmental & Governance Tangles of Municipal Bankruptcy

October 9, 2014
Visit the project blog: The Municipal Sustainability Project

Reconsidering Municipal Bankruptcy. California State Treasurer Bill Lockyer yesterday warned that if the final plan of adjustment submitted by the City of Stockton and approved by U.S. Bankruptcy Judge Christopher Klein next month includes provisions impairing the municipality’s pension obligations to CalPERS, the California legislature could respond by revoking state authority for California cities, counties, and special districts to file for federal bankruptcy protection if they become insolvent, stating: “As a lawyer and a policymaker, I have a different view about the fundamental issues of a state-run pension system and whether it’s even subject to jurisdiction of a bankruptcy court in this circumstance,” he said during his keynote address at the California Debt and Investment Advisory Committee. His comments come in the wake of statements by U.S. Bankruptcy Judges Steven Rhodes, Meredith Jury, and Christopher Klein that the federal chapter 9 law preempts the Michigan and California constitutional provisions protecting contracts, including for pensions—positions with pending challenges before the 6th and 9th U.S. Courts of Appeals. The federal municipal bankruptcy law, chapter 9, bars a municipality from filing for bankruptcy unless authorized by its respective state. Mr. Lockyer added: “If it looks like bankruptcy judges in California are going to be activists in this domain, I wouldn’t be very surprised to see a coalition of teachers, nurses, firefighters, law enforcement people, district attorneys—and the list goes on—all lobby the legislature to change the rules so that no municipality can bring a bankruptcy action in a Chapter 9 proceeding.” Unlike Michigan, Pennsylvania, and Rhode Island—states where the Governors and state legislatures took active roles in helping municipalities both with regard to their pension obligations and recoveries, many believe the state has not only provided no assistance to its cities that are currently in municipal bankruptcy, but also that the legislature’s actions were factors in their respective insolvencies. Perhaps unsurprisingly, Mr. Lockyer offered no guidance with regard to what would happen to a California city or county that became insolvent were the state to bar its right to federal bankruptcy protection—in which case, of course—no pensions or health care benefits would be available.

Nearing the Final Lap. Meanwhile in the Motor City, frantic negotiations under the guidance of U.S. Chief Judge Gerald Rosen with the city’s last major holdout creditor, Financial Guaranty Insurance Co., are reported to be focusing on a possible agreement under which the city could lease most of its public parking facilities to its bond insurers, including FGIC, according to the Detroit News. Under the outlines of the emerging package, FGIC could end up leasing three of the city’s six parking garages, receive riverfront land, and cash to settle its $1.1 billion claim against the Motor City—with the city’s Chief Operating Officer, Gary Brown, telling the paper: “It’s a fluid situation that changes by the day; I wouldn’t be surprised with anything that came out of the bankruptcy with regard to FGIC. Anything is on the table.” Nevertheless, any agreement is still at least days away. The News reports that while the emerging deal would let FGIC recover more than is included in the city’s seventh amended plan of adjustment pending before U.S. Bankruptcy Judge Steven Rhodes (the September 16th version proposes to pay FGIC about 6% of its claim), it would, nevertheless, be less than what rival bond insurer Syncora Guarantee Inc. received in a deal last month. Together, the two bond insurers had insured $1.4 billion in troubled Motor City pension debt that helped former – and now convicted and imprisoned ― Mayor Kwame Kilpatrick prop up the city’s pension funds in 2005. In comparison, the pending debt adjustment plan proposes paying Detroit’s pensioners about 46 cents on the dollar for their $3.1 billion claim.

Certifying. In a related development, Moody’s yesterday warned Wednesday it could downgrade Detroit’s Ca-rated COP’s, or certificates of participation, saying it expects to resolve the outlook when and if the Motor City reaches an agreement with holdout creditor FGIC—which wraps the remaining $1.1 billion of the COPs. The city’s other bond insurer, Syncora, holds some $390 million of the COPs. In its review, Moody’s noted: “In our opinion it is likely that the recovery for creditors will be below 35% and as a result consistent with a C rating.” Adding: “The review will be resolved if and when a settlement with FGIC…is made public.” As part of its effort to seek an exit from bankruptcy, Detroit is suing to repudiate the debt, saying it was issued in 2005 and 2006 with an illegal structure devised solely to avoid state-imposed debt limits. Unlike the city’s agreement with Syncora, however, any agreement with FGIC will require approval by Mayor Duggan and the Detroit City Council.

Where it all Began. Mayhap ironically, the COP’s issue that has become central to Detroit’s emergence from municipal bankruptcy is coming back into sharp relief in the Motor City as jury selection began there yesterday in a case where former and now convicted and imprison Detroit Mayor Kilpatrick is an unindicted co-conspirator in a complex criminal case that is—in bad part—at the root of the city’s insolvency—based upon the issue of what happened to the funds from a $1.4 billion Wall Street deal in which prosecutors allege the money ended up in the pockets of businessmen who bribed pension officials, including former Detroit Treasurer Jeffrey Beasley, with cash, exotic trips and a Christmas basket stuffed with cash. The former Mayor’s name arose repeatedly yesterday as defense lawyers questioned prospective jurors about their views on race, exposure to pretrial publicity, and awareness of the former mayor’s crimes and record-tying 28-year corruption sentence. The trial is being overseen by U.S. District Judge Nancy Edmunds, who sentenced Mr. Kilpatrick and contractor Bobby Ferguson to more than 20 years in federal prison, with the issues spanning the period from 2006 through April 2009. Here the allegation is that the alleged pension fund corruption cheated retirees out of more than $84 million. Federal prosecutors allege city pension officials started approving a series of corrupt investments with businessmen in January of 2006, six months after the Wall Street deal started injecting $1.44 billion into the Detroit pension funds. Further, there are charges that pension fund trustees loaned more than $200 million to businessmen accused of paying bribes and kickbacks, according to federal prosecutors. The businessmen included Georgia resident Roy Dixon, 51, who is charged with embezzling more than $3 million with the help of former Detroit Lions wide receiver Mike Farr and spending some of the cash on an $8.5 million mansion in Atlanta. The four defendants are Beasley, Dixon and two former pension officials: Trustee and former vice president of the Detroit Police Officers Association Paul Stewart and Ronald Zajac, former top lawyer for two municipal pension funds.

The Sharing Economy: Fighting Blight. The City of Detroit and Wayne County have commenced an effort to fight blight that packages several properties, including homes and vacant lots, for sale. Motor City Mayor Mike Duggan and Wayne County Treasurer Raymond Wojtowicz yestoday announced a process being called “Blight Bundle,” under which the two leaders said they intend to encourage the demolition of severely blighted properties and boost the redevelopment of salvageable ones—all as part of a key effort to return tax-foreclosed properties to productive use—and to the property tax rolls. The pair reported that if a bundle of properties fails to receive a bid, the vacant lots involved will be made available for purchase through the Detroit Land Bank Authority. For more details, visit