09.09.13

Insolvency or not? The City of Detroit on Friday filed a 135-page legal document with the U.S. Bankruptcy Court in response to 109 objections to the city’s eligibility for federal bankruptcy protection, noting that the city has more than $18 billion in debt and about 100,000 creditors, it was impossible to continue restructuring talks without declaring bankruptcy, the City of Detroit said in a court document filed Friday. Moreover, in addition to the creditors, the city wrote that it has to address nearly 50 individual union bargaining units and 100 separate, outstanding municipal bond issues—that Detroit was “cash insolvent, budget insolvent and service delivery insolvent,” when it filed for bankruptcy protection on July 18, and that it attempted to negotiate with its unions and other creditors. The State of Michigan, in a separate legal filing, defended Detroit’s right to seek bankruptcy protection, noting the Emergency Manager “recommended the Chapter 9 filing having determined that no feasible financial plan could be adopted that could satisfactorily rectify Detroit’s financial emergency in a timely manner…the governor then approved the filing … none of the numerous objections overcome this basic point.” The claims and counter claims are pouring in in advance of the three dates U.S. Bankruptcy Judge Steven Rhodes has scheduled to consider Detroit’s eligibility: Sept. 18th, for arguments by the city’s creditors; Sept. 19th, for individual retirees and other individuals; and Oct. 23rd, for a trial on other objections, such as whether the city negotiated in good faith.

Essential Municipal Services. Part of a municipal bankruptcy process is juggling: finding a way to deliver critical or essential municipal services—even as the city is in a federal courtroom trying to prove it is insolvent. Thus, even as Emergency Manager Kevyn Orr is focused on preparing for the dates set by Judge Rhodes, at the same time he is juggling efforts to try and restore more “robust” Motor City services, especially in the related areas of public safety and lighting initiatives, and reducing blight. Mr. Orr reports that efforts to restore streetlights and reduce the number of abandoned structures will become more visible within 60 days, even as his team explores privatization and the overhaul of  Motown’s departments.  The city’s lighting authority, he reports, is already “up and funded” and preparing to roll out a lighting plan—after officials had estimated 40% or 35,000 of the city’s 88,000 streetlights do not work.  A comprehensive plan, he said, is expected by the end of the year. Under Orr-hired Police Chief James Craig, the Department has eliminated virtual police precincts, reinstated a gang unit, and initiated an effort to tackle car-jackings. The Emergency Manager has signed off on plans to replace half the department’s fleet of about 450 patrol vehicles by year’s end and has secured new vests, Tasers, and on-body cameras for officers and protective clothing for the city’s firefighters—funded through grants, corporate donations, and cash freed up from defaulted debt service payments. The cameras could be invaluable in reducing its liability and litigation. Last year, Detroit the city paid $22 million in settlements and lawsuits.

Deposing the Governor. U.S. Bankruptcy Judge Steven Rhodes has set a hearing for tomorrow morning to hear arguments on whether Gov. Rick Snyder and other top state officials should be deposed by labor unions in the city’s bankruptcy case or whether to grant the state’s motion to protect Snyder, Michigan State Treasurer Andy Dillon, and others from being forced to testify under oath in depositions requested by the American Federation of State, County and Municipal Employees Council 25, and the United Auto Workers. Michigan Attorney General Bill Schuette has argued the subpoenas created “an unnecessary and undue burden” and are not relevant to whether Detroit is eligible for Chapter 9 bankruptcy.

Preempting Democracy? U.S. Congressman John Conyers (D-Mi.), convened a forum in Detroit Saturday in an effort to receive input from residents about the bankruptcy, information which he said he could take back with him to Washington, D.C. In the session of some 300 persons, there appeared to be a consensus that the city’s efforts to file for bankruptcy were premature, unfair, and destructive. The session at Fellowship Chapel heard from local and state lawmakers, attorneys, clergy, and college professors about the largest municipal bankruptcy in U.S. history, as well as the noted municipal bankruptcy expert, Jim Spiotto. Anger was expressed that Detroit’s state-appointed emergency manager Kevyn Orr is “unelected” and controls the lives of Detroit’s residents without public input. The Rev. Wendell Anthony, pastor of Fellowship Chapel and president of the Detroit Branch NAACP, described Emergency Manager Orr’s position “one-man rule,” while Michigan State Sen. Bert Johnson (D-Highland Park) said dwindling revenue-sharing funds from the state have contributed to the struggles of the city, describing the state role as: “if I take away your ability to financially function, I take away your political power…The bankruptcy is but one piece of this puzzle.” Mr. Spiotto described it as “a good discussion of the issues and the need to stay focused on the Recovery plan to reinvest in Detroit in Infrastructure and essential services and remove the urban blight that has plagued the progress of the City,” reminding us that the “Chapter 9 Bankruptcy is only a process, and not a solution…Without a recovery, the mistakes of the past can be repeated.”

Jeffco Timetable out of Municipal Bankruptcy. As Jefferson County, Alabama focuses on its court date before U.S. Bankruptcy Judge Thomas Bennett for its November 12th bankruptcy exit plan confirmation hearing—the county must make a case to bond rating agencies, creditors, and investors that its plan of adjustment can work. That is the key in order for the county to successfully exit bankruptcy by Dec. 20th, as announced. To achieve that milestone, Jefferson County must soon: renegotiate support agreement with creditors, convince rating agencies to upgrade the county’s junk sewer bonds, and seek potential investors for refinanced warrants.  A key potential tripping point could be about the feasibility of the plan of adjustment for the $3 billion in defaulted sewer debt. Soaring interest rates could likely force a plan amendment. Last June, the county reached an agreement to pay its largest creditors $1.84 billion, or 60% of what the county owed; however, since then, interest rates have jumped more than a percentage point. At current rates, the county could refinance only $1.5 billion to $1.6 billion of sewer debt, according to one expert, who noted: “If you went to market an offered the same amount of debt based on the cash flow you have from the sewer, you would not be able to raise as much money because interest rates have gone up…Unless interest rates come back down by the time we get the votes in we have to go back to the table and get concessions from creditors.” Reopening negotiations could be like opening a can of worms. The potential problems have cropped up as creditors are voting now on the plan that was approved by Judge Bennett last month: ballots are due Oct. 7.

Seeking Fire in the Belly in Stockton.  On the other end of the country, the bankrupt city of Stockton, Calif. is launching its search for a new city manager with a public forum this Wednesday, with the city council and The Mathis Group, a consulting and recruiting firm, seeking community input and participation in the process of finding a replacement for Bob Deis. Stockton Mayor Anthony Silva noted: “We have worked hard to set the course for Stockton’s recovery, and selecting a city manager who has the leadership qualities and characteristics that are the right fit for the council, employees, and the community is extremely important. While the ultimate decision is made by the council and me, we value the opinions and ideas of the community and urge everyone to join us for this important forum.” This week’s forum will include a presentation and overview of the search, nomination and selection process, and offer participations the opportunity to share their priorities and viewpoints. As part of its efforts, the city hired The Mathis Group, led by management psychologist Bill Mathis, during a special meeting in August. Mr. Mathis, who has worked with distressed California cities such as San Bernardino and Fresno, said he believes Stockton’s next city manager should have a “fire in their belly” as well as experience and an understanding of working and living in the diverse community. The next city manager will replace Mr. Deis, who has served as city manager for three years. He announced in June his plans to retire, effective Nov. 1. Manager Deis started work in Stockton in July 2010 and has helped guide the city in its bankruptcy process. Stockton was granted eligibility to file for Chapter 9 protection in April, after declaring bankruptcy in June 2012.

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