09.03.13

Bankruptcy & Pensions. San Bernardino cleared a key hurdle yesterday when U.S. Bankruptcy Judge Meredith Jury declared the city eligible during a summary judgment hearing in the U.S. Bankruptcy Court in the Central District of California, in effect rejecting the sole objection to the city’s federal bankruptcy protection by the California Public Employees Retirement System (CalPERS), clearing the way for the city to begin negotiating with its creditors and to develop a plan which to Judge Jury to clear the next hurdle: a successful exit from bankruptcy: “I am ruling as a matter of law that the city is eligible…I don’t think anyone in this courtroom seriously thought the city was anything but insolvent.” Voters in bankrupt San Bernardino, California, will have a chance to recall three elected officials in November while three more face re-election, putting the majority of the City Council at risk.

Council members John Valdivia and Wendy McCammack, and City Attorney James Penman, are blamed for the “dismal shape” of the city in petitions filed by San Bernardino Residents for Responsible Government.

San Bernardino, about 60 miles (100 kilometers) east of Los Angeles, filed for Chapter 9 bankruptcy in August 2012, after a $46 million shortfall when sales and property taxes failed to recover from the recession. The city of 209,000 is the third-largest U.S. municipality to seek court protection from creditors, after Detroit and Stockton, California.

“The residents of San Bernardino need and deserve stronger and more courageous leadership to restore our city,” Scott Beard, the recall committee leader, said by e-mail.

Three other council members are up for re-election Nov. 5, according to the city clerk’s office. If the recall is successful and all of the incumbents on the ballot lose, five of the seven council seats would turn over.

The survivors would be Chas Kelley and Rikke Van Johnson, against whom the recall effort fell short. Both Kelley and Van Johnson are seeking to replace Mayor Patrick Morris, who isn’t running. If either wins, a sixth seat would be vacated.

U.S. Bankruptcy Judge Meredith Jury ruled Aug. 28 that San Bernardino was entitled to bankruptcy protection, overruling objections by the California Public Employees’ Retirement System, which is trying to recover missed pension payments.

In arguments before the Judge, CalPERS has argued that “genuine issues of material fact exist as to whether the city is eligible to relief.” But Judge Jury yesterday stated she had “disregarded these arguments,” finding they were “not contested before the court.” Judge Jury stated she intends to provide a written opinion in the next few months, outlining the reasons for her decision, but that she would not let that interfere with allowing the process to move forward. The oral decision in the federal bankruptcy court in Riverside yesterday clears one key hurdle in San Bernardino’s fiscal crisis, but opens the far more difficult next steps to putting together a plan to return the city to fiscal solvency. Without bankruptcy protection, city officials had warned, San Bernardino faced “death:” nothing would have prevent creditors from demanding payment from the city—payments that would have meant steep and incapacitating cuts in many essential public services. Such cuts, moreover, would have been devastating in a city that already struggles from the effects of downtrodden commercial cores and high rates of poverty, homelessness, and crime. While Judge Jury’s oral decision yesterday solves none of those underlying problems, it creates time for leaders and the community to try and find a way to way to shore up finances to hopefully address those issues in coming years. Now the city leaders must negotiate with its creditors and produce a final bankruptcy plan on which Judge Jury will ultimately have to rule. Whether pension and other debt payments, including to holders of $50 million in pension obligation bonds, will have to be treated equally or not will remain a key issue – one that could eventually reach the U.S. Supreme Court. As Judge Jury stated yesterday: “If Calpers gets all the money they want, under what they say is their statutory right, who isn’t going to get paid? All the employees? How is that going to help Calpers?” [The case is In re San Bernardino, 12-bk-28006, U.S. Bankruptcy Court, Central District of California (Riverside).] Note: Judge Jury’s decision is certain not to be ignored by Judge Rhodes—as the issue of public pensions is accorded protection by both the California and Michigan state constitutions. One important difference is that CalPERS serves both the state and many, many local governments in California; whereas, the City of Detroit has two public pension systems. Thus, there exist fundamental conflicts between state constitutions and the federal municipal bankruptcy law; yet, as former Rhode Island Supreme Court Justice and Central Falls Receiver Judge Flanders noted: ‘If your house is on fire, or someone is breaking into your home…and you dial 911, a pension fund is not going to respond…’

Gambling on Progress.  Detroit emergency manager Kevyn Orr forced a top administrator who played a crucial role in Mayor Dave Bing’s Detroit Future City plan out of her job on Friday, while also firing the controversial chairman of one of the city’s two pension funds, his office confirmed.

Karla Henderson, a Bing administrator who was a group executive in charge of the city’s planning and facilities, tendered her resignation to Orr’s office. Orr spokesman Bill Nowling said Henderson was given the opportunity to resign because her job will be absorbed into the Detroit Economic Growth Corp.

Meanwhile, Orr fired Cedric Cook, the chairman of the Detroit General Retirement System who took an all-expenses-paid trip to a pension conference in Hawaii earlier this year. Cook’s job with the city is listed on the pension fund’s annual report as a senior data program analyst for information technology services.

Nowling said Friday that Cook was fired “for cause,” and his dismissal was unrelated to the Hawaii trip. Cook could not be reached for comment. He was not fired from his role with the pension board, but will not be eligible to serve as its chairman if he is not a city employee.

Henderson joins a growing list of administrators leaving top city government jobs under the reign of Orr, whom Gov. Rick Snyder appointed in March to oversee a city drowning in $18 billion in debt and retiree liabilities.

Earlier this month, lighting director Richard Tenney was booted from his job as part of Orr’s efforts to restructure city government. That followed the departures of city human resources director Pat Aquart; William (Kriss) Andrews, who had been program management director, and Chief Financial Officer Jack Martin, whom the state recently appointed as emergency manager for Detroit Public Schools.

Bing brought Henderson to the city in 2009 from Ann Arbor and put her in charge of the city’s Buildings, Safety Engineering and Environmental Department. She was a key player in Bing’s Detroit Future City plan to downsize the city to deal with its population drain and concentrate resources on core, successful neighborhoods rather than spreading out resources over areas with few remaining homes and businesses.

She also has been championed by Bing and other administrators as highly effective in getting federal money for demolition of abandoned buildings and for upkeep of city parks. She had become a go-to person for Bing’s public efforts to address blight.

Orr plans to transfer many of the city’s planning and related functions to the nonprofit, independent Detroit Economic Growth Corp., which plays a role in most major developments in Detroit.

“We’re moving those functions over to the DEGC, so at that point it becomes redundant, and Kevyn wants to move in a different direction in that position,” Nowling said.

Henderson, a confidante of the mayor, couldn’t immediately be reached for comment Friday. Nor could Bing’s spokesman, Bob Warfield.

Bing previously expressed disappointment about the state or Orr forcing out key members of his administration or hiring them for other positions, including Andrews and Martin.

Henderson’s resignation comes just days before a Detroit visit by Shaun Donovan, the U.S. Housing and Urban Development secretary appointed by President Barack Obama. Donovan is to visit Detroit next week to mark Bing’s kickoff of a project to begin demolition of the Brewster-Douglass projects, the public housing complex near I-75 close to downtown that has been one of the city’s biggest eyesores.

In her resignation letter, Henderson called it an honor to have worked for Bing and the city.

“I am humbled and honored to serve my home in which I was born and educated and in which my father had the honor to serve under Mayor Coleman A. Young,” Henderson wrote.

Cook was one of four Detroit pension fund trustees who went to a Hawaiian beach resort for an educational conference in May that cost the city’s taxpayer-backed pension funds an estimated $22,000.

The trip drew immediate criticism from Orr. It was one example of pension-fund management that spurred Orr to order an investigation in June into fraud and corruption of the city’s employee benefits programs and its two pension funds — the General Retirement System and the Police and Fire Retirement System. A city that desperately needs business cannot afford to be the single biggest force chasing such businesses away. This is exactly what Detroit has done for years, as developers looking to do just about anything in the city – whether it’s a major new construction project or the opening of a small retail establishment – have to navigate their way through multiple layers of bureaucracy.

Few employers will go through that when they can find far more business-friendly locales that will streamline the process, limit the costs and get them up and running. That’s one of the reasons well-managed cities have healthy job and tax bases, and Detroit has what it has.

So Kevyn Orr’s firing of Karla Henderson as Mayor Dave Bing’s top administrator for his Detroit Future City plan is a step in the direction of truly responsive planning and development. When it becomes more about development and less about endless planning for the sake of planning, then Detroit will have corrected one of its own self-conceived obstacles to economic vitality. One of the thousands, perhaps, but a big one.

As with so much of Detroit city government, planning and development has turned into a bureaucratic morass in which people’s roles were as much for the sake of their own perpetual employment as for anything that benefits the city. The most efficient approval process takes months. As John Gallagher pointed out in the Detroit Free Press last week, the Hantz Woodlands greening and agricultural project took four years just to win preliminary approval.

Orr is looking to consolidate all of this under the nonprofit Detroit Economic Growth Corporation, which is run by CEO George Jackson. I am not sure Jackson is the guy to make all this better, as he has shown a decided hostility toward developers, most recently calling a proposal by Major League Baseball to put a training facility on the old Tiger Stadium site “almost a scam.”

But at least if you consolidate everything under one agency, everyone knows who is responsible, and those with development proposals know who to deal with. A better structure doesn’t solve the problem if you don’t have the right people in place, but a hopelessly inefficient, complicated mess can’t work even with the right people.

Detroit needs that efficiency if it ever hopes to rebuild its tax base and bring decent jobs back to the city. That is more important than any municipal employee’s job. It takes precedence over self-important, blowhard journalists who are upset because it’s harder to file Freedom of Information Act requests with a quasi-public agency than with a city department.

For anyone looking to pick a location for a business, there is so much wrong with the idea of locating in Detroit it’s hard to know where to start. At the very least, the Detroit bureaucracy needs to start by getting out of its own way. Giving the DEGC the authority to fix this, and holding it accountable for doing so, is almost certainly the best chance Detroit has to do just that.

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