7.31.13

Motown’s Timetable to Exit Bankruptcy. U.S. Bankruptcy Judge Steven Rhodes yesterday proposed a calendar in order to help set deadlines for the largest municipal bankruptcy case in U.S. history—as well as to establish deadlines for creditors to object to the city’s eligibility for Chapter 9 relief. Under his proposed order, Detroit would need to file its plan for how it will restructure as much as $18 billion in debt by next March 1st. The proposed schedule affects not just the city and its more than 100,000 creditors, but also the costs of attorneys and person-power that would be expended in the judicial proceedings. Emergency Manager Kevyn Orr and Michigan Gov. Rick Snyder have said they hope the city can emerge from bankruptcy court by the fall of 2014. Mr. Orr is under some pressure to complete his work quickly because, under Michigan’s emergency manager law, he only has 15 months remaining to oversee the bankruptcy. The state law provides that can be removed by the City Council after serving 18 months. Judge Rhodes yesterday also set a conference for this Friday to obtain feedback on the proposed dates from the city and creditors—during which time he could formally appoint Chief U.S. District Judge Gerald Rosen as the mediator who would handle disputes between the city and creditors.

Key Proposed Dates:

■ August 19th―Date by which creditors would have to object to the city’s eligibility for bankruptcy relief. Key issues: did the city prove it is insolvent and that it negotiated with creditors in good faith before seeking federal bankruptcy protection.

■ Aug. 23rd―deadline to serve written discovery requests.

■ Sept. 13th― deadline to comply with written discovery requests.

■Sept. 23― deadline to complete non-expert depositions.

■ Sept. 23― deadline to designate expert witnesses and submit expert reports.

■ Oct. 3― deadline to counter-designate experts and submit reports.

■ Oct. 10― deadline to complete expert depositions.

■ Oct. 17― deadline to submit proposed joint final pretrial order.

■ Oct. 17― deadline to file pretrial briefs.

■ Oct. 21― pretrial conference.

■ Oct. 23― trial on the eligibility objections.

What Does Detroit Mean for Changing State Roles? Peter Baynes, the Executive Director of the New York State Conference of Mayors, reacting to the events in Detroit, this week said: “Virtually all of the causes of Detroit’s dire predicament — unaffordable pension and health care costs, an eroding tax base, and a declining financial commitment from the state — are prevalent here in New York…While our cities are not yet knocking on bankruptcy’s door, there are some that are clearly heading down a path toward Detroit.” Mr. Baynes urged the Empire State to provide “additional financial assistance, meaningful mandate relief, and the accountability necessary to document the results of such investment.” Without growth in state aid, he warned, “a growing overreliance on the regressive property tax will push our communities into the fiscal death spiral that is consuming Detroit.” Mr. Baynes also pressed for relief from unfunded state mandates, starting with pension reform and changes to the arbitration process.

Mayor Stephanie Miner of Syracuse wrote (in an op ed for the Syracuse Post-Standard): “Detroit’s bankruptcy will impact all of us directly and indirectly…It is going to become more expensive for governments to do business as the bond market comes to terms with Detroit’s fate.” She noted that unlike Detroit, Syracuse has “refused to borrow our way into a delayed financial crisis,” because her city has taken tough steps towards fiscal stability. However, it still faces gaps: “With the state’s necessary help, we want to serve the people of Syracuse and New York State by creating an economic model that reflects our new reality…One that recognizes, for example, nonprofits needing expensive government services should pay for those services.” Most of Syracuse’s largest employers are nonprofit institutions exempt from city property taxes. Syracuse University, Upstate Medical University and Hospital, the State University of New York College of Environmental Science and Forestry, and other higher learning institutions are among these institutions in the city of 145,000. The city has four major hospitals. As of 2012, 56% of the city’s land was tax-exempt. In 2011 the city reached an agreement with Syracuse University for the school to contribute $500,000 a year to the city for five years—a small fraction of the $24 million the property’s assessed value would have garnered to the city treasury. Nonetheless, Mayor Miner was unequivocal in making clear her city is not looking for a bailout: “We ask, again, that New York takes a different path from the one chosen by the governor of Michigan.” (Editor’s note: it might be that Mayor Minor, not to mention many in the U.S. Congress, does not understand that the State of Michigan has made clear it has not and will not “bail out” Detroit; nor has the city requested one. Municipal bankruptcy provides not one penny for a municipality that a U.S. bankruptcy court finds eligible.)

In response to Mr. Baynes’ statement, New York Gov. Andrew Cuomo’s office responded the governor and former HUD Secretary has long recognized the fiscal challenges local governments have faced and prioritized helping them deal with these challenges: “Last year he delivered billions in pension savings through Tier VI reform and took over the growth in Medicaid spending…This year he passed the most significant binding arbitration reforms in years. As the governor previously said, each local government faces unique challenges, and there is no one-size-fits-all solution. That’s why we created the Financial Restructuring Board to assist municipalities in making the tough, but responsible, decisions now, in order to avoid fiscal difficulties in the future.”

Amend Chapter 9 to Eliminate State Sovereignty & Subject States to Chapter 9? David Skeel, a visiting professor at New York University School of Law, writing for The Weekly Standard, in a piece due out next week, suggests amending the U.S. Constitution to remove the sovereignty of states and revise Chapter 9 to actually give a U.S. bankruptcy judge the power to forcibly change a debtor’s plan of adjustment, suggesting that even though Detroit’s bankruptcy is only a few days old, it already has become clear that it could bring answers to two very important questions: 1) whether municipal bankruptcy law is a plausible alternative to either bailouts or decades of fiscal malaise for large cities that are sagging under unsustainable debt, and 2) whether it is time for Congress to enact a bankruptcy law for states too. So far, in his view, the answer to both questions looks like yes. In large part, because the states, meeting in the corporation of Philadelphia, created the federal government—and a nation with a unique system of dual sovereignty, or as the U.S. Supreme Court put it more than half a century ago: “When dealing with their proper domestic concerns, and not trenching upon the prerogatives of the National Government or violating the guaranties of the Federal Constitution, the States have the attribute of sovereign powers in devising their fiscal systems to ensure revenue and foster their local interests.” Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 527 (1959), the suggestion of amending the U.S. Constitution in order to apply chapter 9 to states would seem an extraordinary change to the principles upon which the nation was founded—but readers ought to weigh in. In the last Congress, the House Judiciary Committee convened a hearing specifically to explore whether Congress should seek to enact state bankruptcy legislation; there clearly is an effort underway again to lobby Congress to modify the dual sovereignty principals upon which the country was founded.

There is, of course, a related matter: each of the states—except for the Green Mountain state of Vermont—is required to balance its budget annually (Vermont has never not balanced its budget). The federal government last balanced its budget in 2001. As Congress leaves this week for a five week vacation—and has scheduled only 9 days of session in September before the end of the federal fiscal year—a federal government shutdown appears far more likely than not on September 30th. Likewise, with the U.S. debt ceiling rearing its head again, the federal government is fast approaching default. Such a fault—or waiting to act until the very last minute as occurred two years ago in August, would likely, again, adversely affect the credit ratings—and, thereby, the budgets of hundreds of states and local governments—adversely. That is, if anything, it would seem more that apt for the states to consider convening to determine how to apply chapter 9 to the federal government than the other way around.

These are fundamental issues that go to the heart of governance and federalism—ironically in a week when the nation’s governors are meeting in Milwaukee and the state municipal league directors are holding their own annual meeting. These are important issues for their consideration.

 

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