Key Step in San Bernardino; Puerto Rico beats its deadline

August 15, 2014

Visit the project blog: The Municipal Sustainability Project 

Progress in San Bernardino. The City of San Bernardino and the San Bernardino Police Officers Association (SBPOA) last evening announced to U.S. Bankruptcy Judge Meredith Jury that they have reached a tentative long-term agreement. The terms of the agreement are confidential and subject to the gag order imposed by Judge Jury, a development which Mayor Carey Davis. Chief of staff Michael McKinney noted “is an important step forward towards emerging from bankruptcy,” adding that it would bring “long-term stability for the San Bernardino Police Officers Association members and the city.” Ward 5 Councilman Henry Nickel said the police officers’ contract “is the biggest piece of the pie next to CalPERS (the California Public Employees’ Retirement System),” noting that San Bernardino’s bankruptcy emergence strategy has been to work on the “most complex aspects first.” Last night’s agreement is subject to approval by both the City Council and the police union’s members—with the city council set to consider it at a closed door session Monday.

Buying Tiempo. The Puerto Rico Electric Power Authority or PREPA reached an 11th hour agreement with its creditors prior to last midnight’s deadline, releasing a statement saying it’s reached an agreement with creditors to further extend its credit and that it has committed to appointing a chief restructuring officer by Sept. 8th. PREPA’s released statement said the agreements reached yesterday “provide PREPA with a consensual path forward to improve its operations and financial situation,” and will enable the authority to use some $280 million held in its construction fund for payment of current expenses and capital improvements. In addition, the Authority stated that insurers and bondholders controlling more than 60 percent of PREPA’s outstanding bonds have agreed to amend existing bond documents to provide PREPA with liquidity and time to “develop a plan to achieve a restructuring of its business:” the insurers and bondholders will not exercise remedies against PREPA during the term of these agreements, and PREPA will continue to make required debt service payments in full. Further, the authority reported that the banks that provide revolving lines of credit will extend until next March 31st agreements to not exercise remedies as a result of credit downgrades. PREPA will continue to delay certain payments that were due to these lenders in July and August. PREPA said it will file a notice today on the Electronic Municipal Market Access (EMMA) system outlining the key terms of its agreements with the creditor groups.

Detroit’s Confirmation Trial Set; San Bernardino makes progress

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

Getting Ready to Rumble. In the wake of yesterday’s session with attorneys representing the Motor City and its creditors before U.S. Bankruptcy Judge Steven Rhodes, the Judge set deadlines and hearing dates for the confirmation trial to determine if Judge Rhodes will approve the city’s proposed plan of adjustment—allowing the city to emerge from the largest municipal bankruptcy in history by finding that that plan is fair and feasible; Judge Rhodes announced he would delay the trial by eight days, scheduling the historic proceeding to begin Aug. 29th—scheduling as many as 30 calendar days for hearings over the restructuring plan, to determine whether the city’s proposed plan of adjustment to eliminate more than $7 billion in liabilities and reinvest $1.4 billion over 10 years in services is fair and equitable. Judge Rhodes set hearings for: Aug. 29; Sept. 2-5, 8-12, 15-19, 22-24, and 29-30; and Oct. 1-3, 6-7, and 14-17—with the October dates falling after the deadline of October 1—when Mayor Duggan and the Detroit City Council have the authority to request Emergency Manager Kevyn Orr to depart. In the trial, the Motor City will seek to prove it has assembled a plan that will provide for fiscal sustainability and services solvency—and that its plan is equitable. Judge Rhodes said he would allow testimony from an Ernst & Young official at an Aug. 19th hearing to be included as part of the trial, and he said yesterday he would allow retirees who do not have lawyers to present their own evidence and call witnesses when the hearing begins. Attorneys for Detroit and its creditors will begin their opening statements Sept. 2nd. The nearly six weeks’ of hearings are expected to pit Detroit and its supporters—including the Official Committee of Retirees, the city’s two pension funds, several major unions, and (likely) water and sewer bondholders (Please see Motor City Savings on Tap below) against its two major bond insurers — Syncora and FGIC, as well as several hedge funds. Judge Rhodes has allocated 85 hours of trial time equally between supporters and opponents of Mr. Orr’s proposed plan of adjustment to present their cases.

Motor City Savings on Tap? Detroit’s unique tender offer, for which it is seeking a go ahead from U.S. Bankruptcy Judge Steven Rhodes, for its $5.5 billion in water and sewer bonds, appears to be tapping into a potential a success. The offer, part of the city’s proposed restructuring of its DWSD bonds could prove a key step to alleviate a stalemate with the Department’s bondholders and, thereby, remove a difficult hurdle to the Motor City’s efforts to exit municipal bankruptcy. If the city is able to refinance the debt in a public offering, it projects interest rates would be at 5.75% or lower rate, even for uninsured bonds, according to documents filed in the federal bankruptcy court. In addition, Assured Guaranty has agreed to wrap at least some of the new bonds, which would feature a senior lien on the department’s revenues. The proposed refinancing includes the tender offer, a refunding of the tendered debt, a refunding of currently callable debt, and $190 million of new money bonds—with Emergency manager Kevyn Orr’s office warning that without the federal court’s approval, DWSD’s capital budget “will be perilously depleted beginning in October 2014.” That, in turn, could lead to federal EPA sanctions. The offer was cobbled together in the wake of mediation between the city and insurers Assured, Berkshire Hathaway Assurance Corp., Financial Guaranty Insurance Co., and National Public Finance Guarantee, as well as an ad hoc committee of water and sewer bondholders that includes Blackrock Financial Management Inc., Eaton Vance Management, Fidelity Management & Research Co., Franklin Advisors Inc., and Nuveen Asset Management, plus trustee US Bank NA. According to its filing with the court, “the tender would facilitate a consensual restructuring of DWSD’s capital structure, while rendering unimpaired all existing DWSD bond claims and resolving the DWSD bond objections to confirmation of the plan.” Under the proposal, each member of the ad hoc committee has agreed to tender a “significant portion” of its respective, impaired DWSD bonds—upon which Detroit would issue the new bonds either through a public offering, direct purchase, or a private placement—with the Motor City having sought Judge Rhodes’ affirmation that the pledge of DWSD net revenues would constitute a lien on “special revenues.” In the wake of payment to bondholders from the refinancing proceeds, the bondholders would be required to approve the city’s confirmation plan. In addition, under the agreement, the bondholders agreed the DWSD can pay $24 million annually to the Detroit’s general employee pension fund as part of its operation and management expenses—with the payment drawn from a pension liability payment fund that will be funded after payments are made into the state revolving fund junior-lien bond and interest redemption fund, according to the documents. The tender offer which began last week is scheduled to close a week from today—at which time the city will decide by Aug. 22 whether to tender the bonds. Detroit has asked the federal court to schedule a hearing on the motion on Aug. 25th—a motion which, if granted, would mean the bonds would go to market on or around Aug. 26, with a close scheduled for Sept. 4. The refinancing, if approved, would also let the city tap debt service reserve funds for current bonds that hold as much as $50 million, which it would use to reduce the size of the upcoming refunding.

A Taste of What’s to Come. Syncora Guarantee, a bond insurer and Motor City creditor bitterly opposed to the city’s proposed plan of adjustment, Tuesday filed an objection with Judge Rhodes challenging an $800 million settlement put together under the oversight of chief mediator, Gerald E. Rosen, Chief Judge of the United States District Court for the Eastern District of Michigan, whom Judge Rhodes had asked to serve during Detroit’s bankruptcy. Syncora charged that Judge Rosen had said repeatedly that he believed he ought to get the best outcome possible for a single group of creditors — the city’s retirees. Because, Syncora noted, the Motor City’s plan of adjustment was underpinned by the agreement worked out for the city’s retirees, the plan itself should be rejected as impermissibly tainted by the biases of its chief mediator, whose job it was to impartially negotiate out-of-court settlements of as many of the city’s debts as possible. While Syncora told the court it believed that Judge Rosen was acting out of good intentions, the federal court needed to assess whether that might unfairly bias against the requirement that similar creditors be treated equitably. Syncora is an unsecured creditor, as are Detroit’s retirees; but the insurer claims Detroit’s plan of adjustment – under which the city is seeking to repudiate the debt Syncora insured – is entirely inequitable, requesting that Judge Rhodes reject the plan immediately, calling the proposed settlement a “product of agenda-driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors and, remarkably, the city itself.”

Speaking of Mediators….Key San Bernardino city officials and some of the city’s creditors met with their own court-appointed federal mediator, U.S. District Court Judge Gregg Zive, in Reno, Nevada—with discussions not including key creditor, the California Public Employees’ Retirement System, according to Michael McKinney, San Bernardino Mayor Carey Davis’ chief of staff. Likely CalPERS, the city’s largest creditor in its municipal bankruptcy, was not present, because the agency has forged an interim agreement with CalPERS in an effort to help form a plan for San Bernardino to exit bankruptcy protection—after the city withheld its employer portion of CalPERS pension payments from the time of its bankruptcy filing a year ago in July. CalPERS currently estimates San Bernardino’s debt to the agency at $16.5 million, plus interest—although in the outline of its pendency plan in 2012, the city had noted it intended to pay the full amount it owes CalPERS. Working toward a settlement between CalPERS and the city has been the centerpiece of mediation talks with, according to brief statements made in previous filings and court appearances—with the thinking being that once the largest piece of the city’s financial obligations was decided, the remaining parties would have certainty how much remained to adjust with the city’s other creditors.
Unchartering? San Bernardino’s Council could vote today on whether to put proposed amendments to the city charter up for a vote of the people. In our case study on San Bernardino, we noted that its city charter fragments decision-making authority over budgets, personnel, development, and other critical issues among the mayor, city manager, city council, and city attorney—not to mention several boards and commissions—constraints that we noted “Greatly reduce the ability and flexibility of the city to adapt to economic and fiscal conditions as they change over time.” Now, after consideration of five amendments put together by a citizen review committee and discussed at city council meetings, the Council has narrowed its focus to two possible changes which its elected leaders hope could save the city money. At its previous meeting, the council decided not to pursue other proposed changes—changes which would have added a potentially sweeping statement that if multiple interpretations of a provision are possible, the one enabling the city applies; eliminated language governing the school district, which the district does not use; and replacing the city’s policy for recalls and initiatives with state policy. The council has the option of putting either proposed change on the ballot, both on the ballot as one item, both separately, or taking no action. Of the two amendments approved:
• One would eliminate a provision (§186) that guarantees that police and firefighters be paid the average of what 10 other cities with 100,000 to 250,000 people pay. Instead, pay would be set by collective bargaining as it is for other city employees — long a flash point in the city and the focus of most citizens’ charter comments, pro and con, since before the review committee recommended it.
• The second would end the practice of paying any employee who has been terminated or demoted until that employee has the chance to appeal the city’s decision to the civil service board.
With regard to public safety compensation, Mayor Carey Davis said he understood the city cannot underpay its public safety personnel; “[h]owever, I support the committee’s suggestion that salaries should be determined by market forces and our ability to pay…The modifications to Section 186 do NOT represent an automatic pay decrease but it does provide some flexibility to the Council and our public safety personnel with regard to salary discussions which will still be subject to California Law.”

Getting Ready to Rumble in the Motor City

August 13, 2014

Visit the project blog: The Municipal Sustainability Project

Getting Ready to Rumble. Attorneys representing the Motor City and its creditors are due before U.S. Bankruptcy Judge Steven Rhodes this morning for discussions with regard to the confirmation process for Detroit’s debt restructuring in anticipation of the historic trial scheduled to commence a week from tomorrow. The anticipation is that Judge Rhodes will set deadlines and hearing dates for the trial, which is expected to last well into September, to determine if Judge Rhodes will approve the city’s proposed plan of adjustment—allowing the city to emerge from the largest municipal bankruptcy in history by finding that that plan is fair and feasible. On that same afternoon, farther west in Minneapolis at the National Conference of State Legislatures’ 2014 Legislative Summit, we will be moderating a session on Municipal Bankruptcy: “What are states to do when a locality heads south?” The panel features Richard Ravitch, who not only served as Lieutenant Governor in New York and played a critical role in New York City’s near default, but also served in a unique role as a consultant appointed by Judge Rhodes in the Detroit bankruptcy case; Kil Huh, who directs the Pew Center’s work on state and local fiscal health; and U.S. Bankruptcy Judge Thomas Bennett, who oversaw the largest municipal bankruptcy case in American history prior to Detroit’s case—Jefferson County, Alabama.
Homework. With next week’s historic trial set to focus on the disposition of some $18 billion in municipal bond debt, the National Association of Bond Lawyers yesterday released the General Obligation Bonds: State Law, Bankruptcy and Disclosure Considerations, a timely document to assist its own members and other state and local public finance participants better understand the labarynthian world of municipal bonds, especially focusing on general obligation or GO bonds, with a focus on the characteristics of general obligation bonds, state law remedies, municipal bankruptcy, and disclosure considerations. The release emphasizes that, lo and behold, not all general obligation municipal bonds issued by a state, local government, school board, or other public entity enjoy the same security or the same remedies for enforcement of the promise to pay. In addition, as we are likely to learn over the coming weeks as we focus on the trial in downtown Detroit, how a state or local government’s GO bonds are treated in a bankruptcy is uncertain. Although the disclosure for general obligation bonds provided in Official Statements must be tailored to each general obligation bond, the paper does discuss topics that should be considered in preparing an Official Statement for an offering of general obligation bonds. The paper is the brainchild of the organization’s current President, Allen Robertson, who originated the concept as he took office in Chicago last year—in no small part to help state and local leaders better appreciate and understand that while there has been a general assumption that all general obligation bonds are backed by a state or local government’s full faith and credit (e.g. said government has committed to raise taxes to ensure interest payments to all bondholders if necessary), NABL’s new paper tartly notes: “It has become apparent that all general obligations bonds do not enjoy the same security or the same remedies for enforcement of the promise to pay under state or local law…Further, the treatment of general obligation bonds in a Chapter 9 bankruptcy case is uncertain and will depend on the security provided by applicable state law,” adding that the characteristics of GO bonds are determined by state laws and local ordinances, so that the source and security for debt service payments on the bonds may vary from one issuer to another; moreover, NABL adds, some GO bonds are only supported by either a pledge or the issuing state or municipality’s full faith and credit or a pledge of the issuing state or local government’s taxing power, rather than by both. Further, the report finds that the characteristics of an issuer’s full faith and credit obligations vary from state to state. Moreover, for anyone not yet confused, the special report reminds us that there are three general kinds or types of GO bonds: unlimited tax, limited tax, and bonds payable from the issuing government’s general fund—and, even beyond that, the report reminds us that there are variations across state and local governments on exactly what these terms mean. The report examines options bondholders might have in the event of nonpayment of timely tax-exempt GO bond interest under respective state laws prior to a municipal bankruptcy filing—with such remedies dependent upon differing state constitutions and statutes, as well as whatever specific commitments a state or local issuer of GO debt promised to take to ensure payment—with the main remedy being to have a court issue a writ of mandamus, compelling a public official to pay the debt service―albeit, according to the paper, judges, as a rule, are limited in their authority to issue these types of writs if the duty to pay the debt service is mandatory and imposed by state law. Moreover, the paper adds, a state or local government may try to frustrate enforcement of the writ, and federal bankruptcy courts may be unwilling to issue writs when there is a need for governments to prioritize the provision of essential public services to their citizens.

Getting Ready to Rumble in the Motor City & Fitch Likes Chapter 9 Fix for Puerto Rico

August 7, 2014
Visit the project blog: The Municipal Sustainability Project

Trial Delay. Rhythm guitar playing Steven Rhodes of the Indubitable Equivalents (see photo from the Wall Street Journal), who last month was strumming old band favorites for attendees at the American Bankruptcy Institute’s annual meeting in Vermont (classics for you to croon like: “Born to Be Wild,” “Honky Tonk Women,” and “Running on Empty”), yesterday played a different tune at the bar, where, as the U.S. bankruptcy judge overseeing the pending trial to determine whether to approve the Motor City’s proposed plan of adjustment, Judge Rhodes rejected Syncora Guaranty’s motion to delay the commencement of the trial scheduled to start on August 21st. Syncora, with some $7 billion at stake, and one of the few remaining holdout creditors of the city, argued before the bench that Detroit has missed critical deadlines to provide it with key documents. The judicial action came as Toyota yesterday pledged $1 million towards the so-called grand bargain—helping the Detroit Institute of Arts sum up some $80 million—or 80% of its announced goal of $100 million—with the funds, including $195 million from the State of Michigan, to be directed towards ensuring that no Detroit retiree falls below the federal poverty level and that the Detroit Institute of Arts could become a foundation—remaining a key institution in the Motor City.

Bonds on Tap? After weeks of confidential mediation sessions with the city’s major bondholders and insurers, the Detroit Water and Sewerage Department yesterday confirmed it had reached an agreement by which it will be able to refinance up to $5.2 billion in debt, possibly helping to accelerate resolution of the Motor City’s successful exit from municipal bankruptcy and enabling the department to reduce rates to customers—an issue where, because of shutoffs for non-payment—the federal bankruptcy court has raised concerns. The Michigan Finance Authority would issue the debt. In a statement the authority released, it wrote: “This transaction has the potential to significantly lower the interest rate on existing DWSD bonds, reduce DWSD’s debt service costs, reduce risks and transaction costs, and enhance the department’s future cost of borrowing…The savings to DWSD customers could be in the millions.” Under the DWSD plan, effective today through the 21st, the day Judge Rhodes currently intends to open the confirmation trial for the City’s proposed plan of adjustment, holders of the water and bonds will have ten days in which to accept the offer to tender their debt to help the city embark on a massive refinancing of the water and sewer department debt portfolio―with the offer serving as an alternative to Detroit’s current proposals seeking to have its water and sewer bondholders either waive their call protection, allowing for a refinancing, or to accept a lower coupon rate. Under the proposal, bondholders may their bonds or tender them at a fixed tender offer price—a price which was not, as of yesterday, made public. The tender price will be financed either by a bridge loan from Citi, a public offering of exit tender bonds through the Michigan Finance Authority, or a combination of both. Under the plan, bondholders that do tender the bonds would have to agree to drop all objections to the Motor City’s plan of adjustment, and they would be deemed to have permitted debt to be described as “unimpaired” under the plan. Yesterday’s deal raises a legal question with regard to whether the so-called “special revenue” doctrine of chapter 9 would remain because of the voluntary nature of the proposed tender. In addition, the plan raises an issue with regard to whether insurers of the old, outstanding bonds might be afforded the opportunity to claim that their originally insured security is extinguished—so that they would no longer be obligated to pay the old interest amount. What is clearer is that emergency manager Kevyn Orr’s team believes the proposal could be a significant breakthrough, with Detroit’s attorney Heather Lennox yesterday alluding to a major agreement in the offing before Judge Rhodes in the federal bankruptcy court yesterday that could have a major impact on the length of the plan of adjustment confirmation hearings set to begin Aug. 21st. In the tabulation of creditors on the city’s proposed plan of adjustment, 119 out of 151 sub-classes of DWSD voted to reject Detroit’s plan of adjustment—upset that the Motor City was seeking to replace their current bonds without paying all future interest: ergo, a settlement with the DWSD bondholders and insurers would surmount a critical obstacle to Judge Rhode’s favorable approval of the city’s hopes to exit bankruptcy.

The Impact of Congressional Approval of Chapter 9 for Puerto Rico. Fitch Ratings yesterday wrote that the extension of Chapter 9, municipal bankruptcy protection “would be a positive and important development for Puerto Rico and holders of debt of its public utilities and public instrumentalities,” referring to the possibility of Congress approving legislation, HR 5305, the Puerto Rico Chapter 9 Uniformity Act of 2014, which would amend the municipal bankruptcy law to extend to the Commonwealth of Puerto Rico the authority to use Chapter 9 proceedings in federal bankruptcy court to adjust debts of its municipalities and public instrumentalities, or, as Fitch noted: place Puerto Rico on an equal footing with the 50 States, who can currently use Chapter 9 to achieve debt adjustment for their municipalities. The bill, which could be taken up by the House Judiciary Committee, is supported by the National Bankruptcy Conference—which has recommended the amendment be modified so that it would be retroactive. As we have reported, the island is confronted with grim fiscal challenges—leading it to enact a Recovery Act last June—with Fitch yesterday noting: “Given the economic and fiscal pressures facing the Commonwealth itself and its need to provide proper service levels for its citizens, its ability to continue to provide meaningful ongoing financial support to its public corporations going forward would be challenging, in Fitch’s view.” Fitch described the Commonwealth’s recovery act as “an effort to fill the void resulting from the absence of a federal bankruptcy alternative. The Commonwealth has attempted to forge its own framework for orderly debt restructuring applicable to its public corporations, including the Puerto Rico Electric Power Authority (PREPA) and Puerto Rico Aqueduct and Sewer Authority. While the Recovery Act is intended to restore solvency over the long-term, it entails debt restructuring that would trigger suspension of debt payments and preclude the timely payment of principal and interest during the pendency of the proceedings.” But the rating agency noted that the Recovery Act “specifically excluded the Commonwealth’s general obligation debt and certain instrumentalities of the Commonwealth, including the Puerto Rico Sales Tax Financing Corporation,” adding that “the adoption of the Recovery Act and the absence of any preemptive federal bankruptcy alternative, in Fitch’s view, suggest a degree of legal uncertainty regarding how the Commonwealth might act at a time of more severe financial stress to extend the same or a similar act to debt obligations of the Puerto Rico Sales Tax Financing Corporation.” Fitch added that the “adoption of the Recovery Act also spawned litigation and market volatility, potentially increasing the challenge to market access for the Commonwealth and its public corporations. The litigation challenging the Recovery Act will likely be costly to the Commonwealth, a distraction from more important governance activity and will continuously shroud the outcome of any proceedings or agreements entered into under the terms of the Recovery Act with uncertainty.” Fitch noted that while Puerto Rico’s Recovery Act has provisions that “mimic to a degree those in Chapter 9 (municipal bankruptcy),” there are also key distinctions; nevertheless, Fitch wrote: “[C]larifying the rules for restructuring and aligning them to a federal standard with understandable precedent, albeit limited, and providing a federal forum for the proceeding would benefit bondholders. It would also protect the Commonwealth from claims it is acting unjustly or arbitrarily and contrary to accepted norms,” adding that the “range of options available to the Commonwealth and its municipalities and public instrumentalities would be the same as those available in other states.” Fitch added that were Congress to able access to chapter 9 for Puerto Rico, it expected the Recovery Act would be withdrawn.

Sharing Services & State Bankruptcy

August 5, 2014
Visit the project blog: The Municipal Sustainability Project

Trial Delay. The U.S. 6th Circuit Courts of Appeals has agreed to defer appeals by some Motor City creditors with regard to U.S. Bankruptcy Judge Steven Rhodes’ decision last December finding the city eligible for federal bankruptcy protection in the wake of five groups representing Detroit’s retirees requesting a postponement. The creditors told the court they were working with Kevyn Orr and his team to reach a settlement agreement, instead asking the court to delay the hearing until after the confirmation plan trial scheduled to begin during the National Conference of State Legislature’s annual meeting in Minneapolis the week after next. The creditors, along with attorneys for both the State of Michigan and Detroit, had written, in a letter to the panel of judges from the 6th Circuit: “We believe that any action by this court other than holding these appeals in abeyance until after the plan confirmation would significantly undermine a sensitive settlement and court-ordered mediation process, and would jeopardize both the city’s expeditious emergence from bankruptcy and over $800 million of critical funding commitments from the state of Michigan and other outside sources…Holding the appeals in abeyance also ensures that this court will not unnecessarily decide important state and federal constitutional issues.”

Sharing Services & Crossing Bridges. San Bernardino’s City Council last evening voted 5-2 to grant permission to the city’s manager, Allen Parker, to request proposals from neighboring fire departments that may be able to provide the bankrupt municipality with essential fire and rescue services, including the possibility of seeking to have San Bernardino County take over city fire services—indeed, if Mr. Parker’s with his counterpart, San Bernardino County CAO Greg Devereaux or with any other agencies lead to a proposal, the City Council will then vote on whether or not to accept it—albeit with San Bernardino City Attorney Gary Saenz warning he would anticipate the fire union would file suit against the municipality, arguing that the city charter requires the city to maintain its own Fire Department, noting: “There have been legal opinions that say we are allowed, and there have been others saying we aren’t allowed…That’s a bridge to be crossed.” Last night, San Bernardino Councilmember Fred Shorett commented: “There will come a time when the judge will throw us out of bankruptcy court” if the city fails to demonstrate it has a plan to provide fiscal sustainability and essential service solvency, noting: “We need to be looking under every stone.” However, Councilmembers John Valdivia and Benito Barrios opposed the motion, reflecting the comments of the majority of residents who spoke Monday night, with Councilman Valdiva stating: “I feel that as well, that this is political and there’s a vendetta against our firefighters…Not one agency around us wants to touch us, yet we continue going down that path.” Public agencies that could provide service instead of, or together with, the San Bernardino Fire Department include the San Bernardino County Fire Department and Cal Fire, according to a one-page report. Proposals to share are not new to the city, and last year the city commissioned a study to assess the risks and potential benefits—with said study, presented to the Council in June, advising against requesting such a contract at present, and instead recommending the closure of two of the city’s fire stations—and renegotiating its mutual aid agreements. The report to the Council also reported that the California Department of Forestry and Fire Protection (Cal Fire) would not respond, because San Bernardino was in bankruptcy, and the reported advised that no other agencies were interested in a joint powers authority. Finally, the report noted that annexation to the county could take two years. Nevertheless, Councilmember Shorett has been looking farther down the road, reporting that the city could realize as much as $8-$12 million annually through sharing services.

Even with the majority vote last evening, however, the city could confront another snag: some believe the city’s charter mandates that the city retain fire services in-house: the language reads: “The Fire Department shall consist of a Chief of the Fire Department and as many ranking officers, firefighters, and other employees as the Mayor and Council may determine,” albeit another provision in the charter is: “Council shall have power to establish and maintain a fire department, prescribe fire limits and adopt regulations for the protection of the City against fires.” Further potentially complicating the question is one of five proposed amendments that could go before the city’s voters in November, reading: “The language contained in this Charter is intended to be permissive and enabling rather than restrictive or limiting, and shall be liberally and broadly construed in favor of the exercise by the City of its power to govern with respect to any matter which is a municipal affair.”

Does Puerto Rico Offer a way for States in Severe Fiscal Distress? David Skeel, who teaches bankruptcy law at the University of Pennsylvania Law School and a fellow presenter at the Widener Law School Symposium, Bankruptcy and Beyond” in Harrisburg, Pa., in April, yesterday wrote an op ed for the Wall Street Journal, “A Puerto Rican Solution for Illinois,” noting that “If a U.S. commonwealth can declare bankruptcy, it may open the way for states in debt trouble.” Professor Skeel wrote that “If Puerto Rico can restructure its debt, there could be hope for states—particularly Illinois—whose own finances are sketchy.” In his piece, Prof Skeel notes that under the U.S. Constitution, “only Congress has the power to enact bankruptcy laws…, which also prohibits a state (or commonwealth) from altering the terms of existing contracts. And it points to a provision in the federal bankruptcy code that invalidates state laws to restructure municipal debt;” however, Prof Skeel noted that: “Since the early decades of the 19th century, the Supreme Court has permitted states to have their own bankruptcy-like laws if there is no federal alternative—as there isn’t for Puerto Rico. The Constitution’s Contract Clause would be a death knell for Puerto Rico’s debt-restructuring law if courts interpreted it strictly. But they don’t.
“States are permitted to intervene if there is a genuine emergency, and the state action is reasonable and necessary to address the emergency. This flexibility was the basis for provisions in the Michigan law that also made it possible to bring in an emergency manager in Detroit. The provision in the federal bankruptcy code that invalidates state laws to restructure municipal debt probably does not apply to Puerto Rico—since its municipalities are not permitted to use Chapter 9.” He notes that Congress, in its wisdom…: “could dispel the uncertainty by allowing Puerto Rico’s public corporations to file for bankruptcy under Chapter 9—(similar to the legislation, HR 5305, we reported on by Puerto Rican U.S. Rep Pedro Pierluisia, last week.), adding: “Ideally, Puerto Rico itself, not just its municipalities, could be allowed to file for Chapter 9. The unpalatable alternatives are an unlikely, and unwise, federal bailout, or a messy default.”

In a key graph (especially when one scans the enclosed box illustrating how costly borrowing is for defaulted sovereigns…), Prof. Skeel writes: “Whether or not Congress acts, Puerto Rico, with a total public debt of $73 billion, has become the most important test case ever for the question of whether American states should be permitted to file for bankruptcy. Unlike Detroit, whose fiscal woes do not reflect a statewide crisis, Puerto Rico’s crisis is pervasive. If the commonwealth can successfully restructure the debt of its public corporations, this will strongly suggest that Congress should provide a mechanism for troubled states to file for bankruptcy.”
He notes, particularly: “The state that should be watching Puerto Rico most closely is Illinois. With a total debt of more than $321 billion, including more than $200 billion in unfunded pension obligations, Illinois is in an increasingly dire financial condition. A modest pension reform enacted last year could help a little, but it is under a legal challenge, based on a provision in the state constitution that protects even unaccrued pension obligations. The Illinois Supreme Court has already reinterpreted that provision, in July, to protect health-care benefits.
“A federal bankruptcy law covering Illinois (or New York or New Jersey or California) would trump any state constitutional provisions or court decisions and permit the restructuring of unfunded pension obligations. It would also give a hopelessly overextended state breathing room to return its finances to balance. The prospect that unsustainable pension promises could be restructured would give lawmakers and public employees in every state a much greater incentive to avoid making unrealistic promises.”

Action by Congress, however, to enact federal legislation for state bankruptcy would confront a number of legal impediments—especially the issue of dual sovereignty, which precludes the Federal Government from imposing a mandatory bankruptcy procedure on the states—dual sovereignty being one of the defining features of our nation’s constitutional blueprint. Put differently: states, upon ratification of the Constitution, did not consent to become mere appendages of the federal government, but, rather, entered the Union “with their sovereignty

Juggling Federal Courts in Detroit’s bankruptcy

             July 31, 2014

Visit the project blog: The Municipal Sustainability Project 

Trial Delay. U.S. Bankruptcy Judge Steven Rhodes on Tuesday said he had decided to push back the date of the confirmation hearing of Detroit’s plan of adjustment by one week to August 21st—in part to ensure creditors opposed to the city’s plans would have adequate time to peruse the emergency manager’s fifth version of the plan—just filed last Friday, noting: “The court concludes that the record does establish extraordinary cause for the limited adjournments of hearing dates and the limited extensions of deadlines.” Judge Rhodes scheduled dates for the trial through September 23rd. Emergency Manager Kevyn Orr has reached settlements with all of the Motor City’s major labor groups, but a handful of financial creditors, all related to the city’s municipal bond debt, remain opposed. In settling on the seven day delay, Judge Rhodes said he took into account creditors’ requests for delays in making his decision: “The court concludes that the record does establish extraordinary cause for the limited adjournments of hearing dates and the limited extensions of deadlines set forth in this order…However, the court again concludes that the record fails to establish cause for the adjournments and extensions that these creditors have requested.” Under the new schedule, all depositions of experts and non-experts need to be completed by Aug. 11; the deadline for objectors to file supplemental objections to the current plan of adjustment (version 5) is August 12th, and pretrial briefs are due to the federal court no later than August 15th. Judge Rhodes set aside the following dates, if necessary, for the trial: Aug. 22, Aug. 25-28, Sept. 2-5, Sept. 8-12, Sept. 15-19, and Sept. 22-23.

How many monitors? Detroit Emergency Manager Kevyn Orr has withdrawn his modified proposal incorporated in the most recent (5th) plan of adjustment filed with the federal bankruptcy court last Friday to provide for a monitor to track the implementation of the Motor City’s plan of adjustment—if and when approved by Judge Rhodes, filing a modification with the court late Tuesday to delete the so-called “plan monitor,” who would have been responsible for keeping U.S. Bankruptcy Judge Steven Rhodes up to speed on the city’s recovery progress.  Mr. Orr’s spokesperson said that Mr. Orr decided to withdraw his proposal to hire a post-municipal bankruptcy monitor after speaking with state officials and Mayor Mike Duggan, and coming to the conclusion that with the state already having created a financial review board and other statutory provisions, that should provide sufficient oversight: “The monitor would have been superfluous to the oversight outlined in the … legislation.”

No Subpoena. Financial Guaranty Insurance Co. (FGIC), a holdout creditor, has reached an agreement with the State of Michigan to withdraw its subpoena of Michigan Gov. Rick Snyder. Nevertheless, FGIC still intends to subpoena and depose the Governor’s Chief of Staff, Dennis Muchmore, as well, possibly, as other members of the Governor’s staff. Moreover, FGIC reserved the right to depose Gov. Snyder in the future as part of its efforts to get the federal court to reject the Motor City’s plan to repudiate $1.4 billion of its certificates of participation (COPs), for which FGIC is the main insurer. In addition, FGIC intends to grill Mr. Muchmore on issues related to the Motor City’s assets that could be monetized, such as the value of the Detroit Institute of Art’s world class collection.

Gambling on the 6th.  In the wake of the 6th U.S. Circuit Court of Appeals’ challenge  late Tuesday to Motor City holdout creditors to decide within 48 hours if they intend to contest Detroit’s eligibility for bankruptcy and its plan to cut pensions, Judge Julia Smith Gibbons, who heading a three-judge panel that was to hear the arguments, wrote that she was pleased that settlement negotiations were progressing, but that time was running out: “The panel does not consider further delay in rendering a decision an option at this time.”  Judge Gibbons explained the panel required time to rule before U.S. Bankruptcy Judge Steven Rhodes opines on the Motor City’s proposed plan of adjustment—with that trial scheduled to commence August 21st. Judge Gibbons gave creditors until the close of business today to determine whether or not to proceed.  In any event, Syncora Guarantee did proceed with its efforts to bar Detroit’s access to its casino revenues, appealing the lower court’s decision that the $15 million in monthly casino revenues belongs to the city—an appeal which one of the trio of judges termed: “fairly Draconian.” Syncora was appealing U.S. District Judge Bernard Friedman’s concurrence with U.S. Bankruptcy Judge Steven Rhodes’ ruling of last August that the casino revenues are property of the bankruptcy estate and subject to an automatic stay freezing lawsuits against the city. The company claims it has a lien on the money, which had been used as collateral since 2009 to secure the swap agreements. Detroit, which entered those agreements to hedge interest-rate risk on pension debt, agreed in a settlement earlier this year to pay $85 million to the swap providers. Syncora has maintained the settlement would cause it financial harm.  (Syncora is one of two bond insurers that insured the underlying debt of former Mayor Kwame Kilpatrick’s administration that was issued to prop up the city’s pension funds, and it has been arguing that the casino tax revenues should be dedicated to making payments on the city’s $1.4 billion in pension debts, rather than forcing Syncora to pay the insurance claims.) Judge Julia Smith Gibbons gave no timeline for a decision but told the parties the three-judge panel would consider the arguments “carefully.” The federal appeals court had initially scheduled oral arguments for yesterday on seven other cases that appealed Judge Rhodes’ December decision finding that Detroit was eligible to file for municipal bankruptcy, but those proceeding were canceled at the request of the city and the appealing parties due to actual or pending settlements. Attention is now expected to revert to four other Detroit creditor groups that have been seeking to appeal Judge Rhode’s chapter 9 eligibility decision of last December: the Detroit Fire Fighters Association, Detroit Police Officers Association, Retired Detroit Police Members Association, and the city’s two pension funds; but the groups, who have reached agreements with the city, spent much of last weekend in an effort to get the hearing scrubbed. 

How’s Detroit Progressing? Residents will be able to view the number of new streetlights installed in their Detroit neighborhood, how many lots were mowed and the number of vacant houses demolished by going to the city’s website. The Detroit Dashboard features links to information on community initiatives and city programs. For instance, the DD last week registered that 12,000 vacant lots were mown, 570 tons of illegally dumped trash and other materials removed, and 88 homes were torn down. In addition, the DD has reported that 57 lawsuits have been filed against owners of abandoned properties. Updates are scheduled for today and every Thursday.

Are there Motown Lessons for State & Local Leaders? The state and local credit rating agency , Standard & Poor’s, or S&P, yesterday hosted a webinar with regard to the relationship of pension debt of a municipality versus its bond indebtedness, with its analyst Rod Lukic commenting: “All politics is important, and it plays a role in recovery…Main Street factors should be considered when conducting your recovery analysis.” Mr. Lukic was focusing on the discrepancies in the way in which the Motor City worked pit dissimilar settlements with some of its biggest creditors, noting the significant distinctions between the 26% haircut for Detroit’s unlimited tax general obligation or GO bondholders versus more than double that, 66%, for its limited-tax GO municipal bond holders, compared with much smaller haircuts for its retirees: “It’s brought out a good dialogue on how pensioners are treated over bondholders, and the contrast in this case is pretty stark…The question is, is it going to inform the actions or conversations going forward for other distressed issuers (municipalities)?” The biggest less learned, Mr. Lukic noted, is that in a severe distress situation, “governments are increasingly forced to choose between essential services and honoring their debt obligations…The recovery analysis needs to be flexible enough to capture all the nuances of legal and even political [factors] that impact recovery prospects.” He added that an important factor for potential purchasers of a city or county’s municipal bonds is whether the city or county is located in a state that provides a statutory lien on GO bonds. Finally, he commented that while the Motor City’s municipal bankruptcy has not yet formally altered the way in which S&P rates state and local tax-exempt bonds, the agency could change its market risk profile of municipal GO bonds in the future.

Transitioning back to self government after Municipal Bankruptcy & Trying to adopt a post bankruptcy budget

             July 30, 2014

Visit the project blog: The Municipal Sustainability Project 

Transitioning Power in the Motor City. Detroit Emergency Manager Kevyn Orr yesterday issued his 31st Order, this one relinquishing control over the Detroit Water and Sewer Department to Mayor Mike Duggan. The order restores to the city the authority to manage the utility and make appointments to the Board of Water Commissioners. In his statement, Mr. Orr wrote, “As the Detroit Water and Sewerage Department works to operate more efficiently and communicate more effectively with customers, it is important to ensure there are clear lines of management and accountability;” however, the order includes a proviso: “The EM may modify, amend, rescind, replace, supplement, or otherwise revise this Order at any time.” In one sense, this is the transfer of a hot potato, U.S. Bankruptcy Judge Steven Rhodes and others have harshly criticized the emergency manager’s handling of water shutoffs to Motor City residents who owe more than $150 or are at least two months behind on their payments—as his office has sought to gain control over and recoup nearly $90 million, including more than $43 million from some 80,000 overdue accounts from residents. In his order, Mr. Orr noted: “This order provides additional clarity to the powers already delegated to the Mayor… This order ensures a common focus on customer service and sound management practices that reflects the city’s commitment to refocusing its efforts to help DWSD customers get and remain current on their water bills.” Mr. Orr’s spokesperson, Bill Nowling, further clarified the boundaries of the transition yesterday when he said it was “important to note that Order 31 does not delegate to the Mayor any authority over negotiations on creation of an authority or any other restructuring issue.” The transition comes at a tricky moment: the city’s water and sewer department, suburban officials, and the Motor City were ordered into mediation last April – under a gag order. Nevertheless, Mayor Duggan yesterday wrote that he had met Monday evening with the leadership of the Detroit Water and Sewer Department (DWSD), adding: “We need to change a number of things in the way we have approached the delinquent payment issues, and I expect us to have a new plan shortly…There are funds available to support those who cannot afford their bills — we need to do a much better job in community outreach to tell our residents how to access those funds. We will be developing a plan that allows those who are truly needy to access financial help and allows those who want to make payment arrangements to do so with shorter wait times. As for those who can pay and choose not to, we won’t force other Detroiters to pay their bills.” Because the Department serves the metro area, its board is representative of its service area, including: four members from Detroit and one each nominated by the Wayne County Executive, the Oakland County Water Resources Commissioner, and the Macomb Public Works Commissioner. With Mr. Orr’s appointment subject to termination by Detroit’s Mayor and Council on October 1st, the delicate process of transition—an issue distinct from the Jefferson County, Stockton, Vallejo, and San Bernardino municipal bankruptcies—where state laws do not provide gubernatorial authority to preempt municipal authority through the appointment of emergency managers—the order yesterday would appear to be an early effort to try and ensure a smooth transition.

Gambling on the 6th.  The 6th U.S. Circuit Court of Appeals today will entertain oral arguments on an appeal by bond insurer Syncora Guarantee Inc. of U.S. Bankruptcy Judge Steven Rhode’s decision last August denying the insurer access to the Motor City’s casino tax revenues, finding that those revenues, because they were part of the bankruptcy estate, were subject to the code’s automatic stay provisions—a ruling confirmed by the U.S. District Court earlier this month—and a vital ruling, as it has meant the Motor City has been able to continue to have access to what has proven to be one of the city’s most reliable revenue streams.

Fire in the Hole. U.S. Bankruptcy Judge Meredith Jury yesterday heard arguments on the San Bernardino firefighter unions’ attempt to sue in state court over alleged legal violations relating to layoffs and other reductions the City Council approved as part of its FY2015 budget. The adopted budget calls for two layoffs and four demotions that are scheduled to take effect in September, but the union is arguing the city’s budget action targets specific individuals for political and retaliatory purposes, with its attorney, Corey Glave, stating: “The cuts to the fire department, which contradict recommendations by the City’s own experts, put both firefighters and the general public at risk and are being viewed as retaliatory as they directly target no less than four members of the Board of Directors for the San Bernardino City Professional Firefighters…It is becoming clear that the City is seeking to gain some form of an advantage over the union in the Bankruptcy Court by disrupting the union’s board of directors.” As we reported early this month, San Bernardino, at its 11th hour, adopted some $2 million in cuts to its Fire Department budget as part of its $22 million in savings it adopted, including the closure of one fire station. In its response, San Bernardino City bankruptcy attorney Paul Glassman and City Attorney Gary Saenz, wrote that the laid-off employees can — and did — schedule hearings with the city’s Civil Service Commission, adding: “The tempest in the teapot that the SBCPF has created about the layoffs is a ruse for their goal of obtaining state law and state court jurisdiction over the rejection of their contract and the adjudication of the claims arising from the rejection,” adding they believe the accusations of bias are unsupported and unfair: “The (fire union’s) Stay Relief Motion, with its incendiary and irresponsible attacks on Chief Drasil, personal and professional, alleging anti-union animus, is nothing more than an effort to undermine Chief Drasil’s credibility as a witness for the City’s contract rejection motion,” the filing states. “The Court should not abide such scurrilous tactics and should reject the Stay Relief Motion for that reason alone.”

In response, U.S. Bankruptcy Judge Meredith Jury yesterday denied permission for the union to sue San Bernardino in California state court, but said she would entertain the union’s arguments in federal bankruptcy court, also finding that the union’s plea was “premature,” because the effective date for the cuts is scheduled for Sept. 23rd, although Judge Jury noted: “I put it (blame) on the city, that they didn’t communicate with the fire chief.” Judge Jury said she might later allow relief from the stay, but she repeated previous comments that she is “really reluctant” to have another court whose timing she cannot control get involved in the city’s efforts to address its fiscal situation and put together a plan of adjustment in order to emerge from municipal bankruptcy: “The city is doing this to try to balance the budget, in order to propose a way to go forward in a Chapter 9 proceeding.” Judge Jury noted that San Bernardino filed for federal bankruptcy protection, because it was insolvent: it could not meet payroll, but—describing the dilemma, added: “I also agree with you (the union): they can’t violate the (city) charter in order to do what they have to do in a Chapter 9 plan.”

On Monday evening, San Bernardino proposed a new contract, which Mr. Glave yesterday told the federal court he considered to be the city’s first proposal on a new contract. In response, Judge Jury said that while that proposal may have come arrived a little late, it did appear to her that the city had been attempting to negotiate with the union: “I see the stonewalling coming from the firefighters…And maybe that’s unfair, but that’s what I see, because no one else looks like they’re being stonewalled by the city.” (San Bernardino has reached agreements with most of its employee groups, and officials with the city and police union say they are close to an agreement.) Nevertheless, Judge Jury ordered the two sides to come to the bargaining table: “You’ve all got the message that this needs to happen as soon as you can.”

Can the Weed in San Bernardino be a Twofer? San Bernardino City Attorney Gary Saenz is proposing that the municipality be the first city in California’s San Bernardino County to allow some medical marijuana dispensaries — in the hope of both raising revenues, as well as enforcement with regard to illegal dispensaries that seem to have achieved little impact, notwithstanding the municipal ban. Mr. Saenz’s plan, which he first proposed at a city Council meeting last week, was sent to the city’s legislative review committee for review this Monday—with a draft ordinance and public hearing scheduled for a presumably weedless committee meeting scheduled for a week from Saturday. According to Mr. Saenz’s office, Palm Springs, the only municipality in the region that currently permits such dispensaries (it has authorized four for its 44,500 population), anticipates getting a little high from the projected weed revenue gained by means of a 10 percent tax—$500,000 annually—an amount approximately equal to what the city expends annually on enforcement. Under Mr. Saenz’s draft proposal, there would not be a cap on the number of such dispensaries, but the proposal would limit which zones allow dispensaries and prohibit them from being within certain distances of “sensitive uses” such as schools (1,000 feet), substance abuse rehabilitation centers (500 feet), and residential uses (150 feet). In addition, as the city noted, any ordinance would have to take into account federal laws: “It is important to the federal government that any state or local regulatory framework contain robust controls and procedures on paper as well as in practice…If the City of San Bernardino does enact a regulatory scheme for marijuana dispensaries, the regulatory framework will need to be thorough with regards to federal priorities and consistently enforced. Critical to such a regulatory scheme will be sufficient resources allocated to enforcement.”