09.04.13

Motor City Election Progress. The Michigan Board of State Canvassers yesterday announced that former Detroit Medical Center CEO Mike Duggan had won the Aug. 6th Detroit mayoral primary election. The decision came after a protracted certification process after the Michigan state Court of Appeals last Friday cleared the way for yesterday afternoon’s deliberations by ruling a Detroit clerk candidate’s lawsuit should not be permitted to delay a certification vote. Certification requires at least a bipartisan three-member majority from the panel of two Republicans and two Democrats, who are scheduled to review the state’s unofficial tally that shows Duggan with 48,716 votes to Wayne County Sheriff Benny Napoleon’s 28,391 votes. The four-member state canvassing board unanimously certified that Duggan received 48,716 votes in the primary, more than 4,000 more than Detroit election workers unofficially tallied for him and nearly 25,000 more than a Wayne County canvass report said he received. The decision gives Duggan the primary election victory, barring any recount efforts. He and Wayne County Sheriff Benny Napoleon will square off in the Nov. 5 general election. The process of picking what will likely become the post Emergency Manager, post-bankruptcy elected leadership of Detroit has been beset almost from the beginning. Last week, Ingham County Circuit Court Judge Joyce Draganchuk issued a temporary restraining order to prevent the state Bureau of Elections from retabulating thousands of write-in votes from 385 of Detroit’s precincts, leading to a challenge from Michigan Attorney General Bill Schuette last Friday afternoon, and a subsequent ruling by the Michigan Court of Appeals Friday to allow the state canvassers to proceed with the certification process. The state canvassers became responsible for certifying the primary election results after the Wayne County Board of Canvassers failed to do so last month. Wayne County canvassers, last month, had refused to certify the city’s election results because of a discrepancy in how roughly 18,000 write-in votes were tabulated. Some city election workers counted them on election night using hash marks, while others used numerals. The county board was presented a legal opinion on Aug. 20, the last day in the 14-day time frame to certify the results, by a member of Wayne County Corporation Counsel Zenna Faraj Elhasan’s staff saying that only the write-in votes tallied with hash marks (instead of numerically) could be counted. Mr. Duggan had conducted his primary campaign as a write-in candidate after the Wayne County Circuit Court and the state Court of Appeals had removed him from the ballot for filing to run for election two weeks earlier than the Detroit City Charter stipulates. The decision means that Messieurs Duggan and Napoleon still are assured of facing off in the November ballot.

Detroit: Trying to Stay on a Fast Track.  Yesterday, U.S. Bankruptcy Judge Steven Rhodes granted the State of Michigan’s request for an expedited hearing on a motion to quash a request to depose Gov. Rick Snyder, and ordered holders of the city’s pension certificates and retirees to join the case’s first mediation session, setting a hearing for next Tuesday on the state’s motion. Judge Rhodes’ actions yesterday were in response to last week’s request by public employee union attorneys for key information to establish a timeline of decisions leading up to the city’s July 18 filing for municipal bankruptcy protection.  On Sunday, Michigan Attorney General Bill Scheutte’s office filed a motion asking the court to quash the motion and protect Governor Snyder and others from having to give future testimony, and asked for an expedited hearing on the motion.  In addition, Judge Rhodes ordered additional parties to join the first mediation session, scheduled for Sept. 17th before Judge Gerald Rosen: In addition to the city, the unions, and other creditors, the Judge Rhodes ordered that the ad hoc Certificate of Participation (COP) holders, including Dexia Credit Local, Dexia Holdings Inc., Norddeutsche Landesbank Covered Finance Bank SA, and EEPK Bank and its affiliates, to join the mediation session, as well as a newly formed nine-member committee representing the city’s retirees who are not formally represented by the unions. Judge Rhodes directed that the parties are required to submit a mediation statement outlining their goals and objectives with him by this Friday. AFSCME, the UAW and a retiree group have requested various records from state officials that could bolster their claims that the city negotiated in bad faith and is not eligible for bankruptcy protection, while Attorney General Bill Schuette’s office has argued the subpoenas created “an unnecessary and undue burden” and are not relevant to whether Detroit is eligible for Chapter 9 bankruptcy. In his order yesterday, Judge Rhodes asked attorneys from the unions to explain “how each document request that is the subject of the motion is relevant to the factual issues” related to bankruptcy eligibility.

Risky Business—with no Plan B. With the help of transcripts of depositions released yesterday by the Detroit City Clerk, we learn that by early last May, Detroit emergency manager Kevyn Orr was fearful that the city’s finances were at risk of imminent collapse were Detroit to lose access to all of its casino tax revenues, and by June, the city’s financial condition had deteriorated so rapidly that the paychecks of some city employees were bouncing: “I heard that an employee of the city had gone to cash their paycheck and the paycheck had bounced…They came back in later that afternoon and it cashed, but we were — we were that precarious in terms of our cash.” At the time, according to Mr. Orr, the city only had about $4 million to $9 million of cash on hand on any given day. Indeed, on Flag Day, June 14, the city presented a report to creditors and defaulted on a $39.7-million pension payment—defaulted in order to conserve cash critical to the provision of essential services to residents. The situation has since improved, with Mr. Orr advising the city now has between $30 million and $40 million of cash on hand on a daily basis—essentially because of its August tax-collection period. The depositions, which were taken last week as part of an objection by Syncora, one of the city’s creditors, demonstrate the proximity to insolvency of the city and, consequently, the urgency driving both Mr. Orr and the Governor to file for chapter 9 on July 18th. The depositions also appear to demonstrate how vital the city’s casino tax revenues are to keep the city in operation, or, as Mr. Orr stated: “I will say again, every day that we don’t have access to casino revenue, we cannot make the reinvestment in this city to provide for the health, safety and welfare of the citizens, and that’s a true statement.” Specifically, in response to the query whether the Emergency Manager had a plan B or alternative source of revenue other than the casino revenues, Mr. Orr replied no—noting the city had reduced its workforce by thousands in recent years. In a separate deposition, Kenneth Buckfire, Detroit’s investment banker, replied in his deposition that short-term cash flow projections developed by accounting firm Ernst & Young last May alarmed the city’s top officials and caused them to seek a new agreement for the casino revenue: “It was clear that the financial condition of the city was more dire than I had expected….” Without a renegotiation of its casino revenue, Mr. Buckfire said in his deposition, “The city’s ability to operate would be in severe jeopardy, and it became a life-or-death issue for the city.” To Detroit, thus, protecting access to about $180 million in annual casino tax revenue in installments of about $15 million per month is its critical lifeline. The depositions came from a phalanx of 21 lawyers representing the city, its creditors, pension funds, retiree associations, and financial institutions to depose Mr. Orr, while 12 others deposed Syncora and other creditors, who have been challenging an agreement reached July 15 between the city and two banks: UBS and Bank of America Merrill Lynch, which would give the city greater access to casino tax revenue. Tax revenue generated by the city’s three casinos — MGM Grand Detroit, Greektown and Motor City Casino — is the city’s third largest source of revenue, behind income and property taxes. The city also is trying to use that revenue stream to help secure additional financing that would help Detroit continue to function during the bankruptcy process. Buckfire said that about 30 banks or financial institutions have expressed interest in providing financing to the city during its time in bankruptcy. He said officials are trying to secure $350 million. (Mr. Orr is proposing a settlement in which the city would pay 75 cents to 82 cents on the dollar to exit a $344-million Swap transaction in which Detroit received fixed interest rates on its pension debt, but that agreement has been challenged by Syncora, which insured the swaps.)
Coming to Terms with Bankruptcy. In granting San Bernardino eligibility for chapter 9 last week, U.S. Bankruptcy Judge Meredith Jury told the city to prepare an outline or “term sheet” of its bankruptcy exit strategy for mediation to be conducted soon by retired U.S. Bankruptcy Judge Gregg Zive of Reno; she also pressed the city to promptly deliver a plan to cut debt and exit bankruptcy. To which, after briefly conferring with city finance officials, an attorney for San Bernardino responded that the city could have a term sheet ready by the end of the year or early January. That, unsurprisingly, did not sit well: “You are making my (eligibility) ruling look bad,” Judge Jury told the attorney: “You are digging yourself in a hole, and you are going to get a reconsideration. Think some more.” It seems like San Bernardino faces a rough schedule: it has a CalPERS valuation due in mid-October, a fiscal 2011-12 city budget audit due in a month, a ruling on a union contract, and the outcome of a November election city council election that includes a recall. Nevertheless, while Judge Jury explained she is not requesting exact numbers, she needs a concept, which, she explained, is not a final “plan of adjustment” to cut debt, suggesting, for instance, that “ballpark” CalPERS figures should be available, but expressing exacerbation: “It makes me question whether there ever was an end game.” At the same time, Judge Jury also appears confused about what the state public retirement system CalPERS expected to gain by opposing San Bernardino’s eligibility for bankruptcy, noting the only apparent alternative is dissolving the city, leading her to query: “How does that help CalPERS if the employees aren’t paid?” CalPERS’ attorney Michael Gearin, responded that a ruling finding San Bernardino eligible for bankruptcy could set a “dangerous precedent” that might encourage other debtors to create a “self-inflicted crisis” and file for bankruptcy without pursuing alternatives.

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