Motor City & Michigan’s Emergency Manager Law. The question over the legality of Michigan’s emergency manager law will be on the docket today before U.S. Bankruptcy Judge Steven Rhodes in Detroit. Judge Rhodes will hear arguments from the NAACP and others requesting Judge Rhodes to unblock the automatic stay against any litigation against the Motor City—and to permit the organization’s suit against the Michigan emergency manager law, Public Act 436, to go forward in a U.S. district court.   U.S. Bankruptcy Judge Steven Rhodes, who oversees Detroit’s Chapter 9 case, will hear arguments over the legality of the state’s emergency management law, as well as other issues, in a hearing on Wednesday. That suit was halted after Detroit filed for Chapter 9 bankruptcy protection last July, under the automatic stay that halts legal action against the city during bankruptcy proceedings. The civil rights organization has argued that its suit is not related to the Motor City’s municipal bankruptcy, but rather addresses “important constitutional law issues” that should not be delayed due to the city filing for bankruptcy. The NAACP is not the only party challenging the Michigan law: several creditors opposed to the Chapter 9 filing have charged that emergency manager Kevyn Orr lacks the authority to file for bankruptcy because PA 436 is illegal. Judge Rhodes is likely to consider a request this morning also from the Michigan Council 25 of the American Federation of State, County, and Municipal Employees to allow another judge to execute his opinion on a damage award tied to one of the city’s pension systems. AFSCME has requested that Judge Rhodes amend the automatic stay so that Administrative Law Judge Doyle O’Connor can issue an order before he retires on Friday.

Federal Shutdown’s Impact on Municipal Bankruptcy Proceedings. The shutdown of the federal government last night could begin to impact the municipal bankruptcy proceedings in San Bernardino, Stockton, Jefferson County, and Detroit unless Congress acts soon. U.S. courts are trying to assess how much longer they can continue to operate, with a spokesperson for the U.S. District Court noting:  “After 10 days we’ll have to reassess and see where we go from there,” Rod Hansen, the media information officer for the U.S. District Court, said; “Judge Rhodes is determined to move this along without delay, and how persuasive he might be in being able to continue on, I don’t know.”

The Costs of Municipal Bankruptcy. The committee of advisers assigned to monitor the city of Detroit’s spending on attorneys and consultants during its Chapter 9 bankruptcy submitted its first invoice yesterday in the wake of its first month of oversight: $47,897.35. That is, the city of Detroit will pay that amount just for the monitoring of the legal costs incurred for September. Robert Fishman, the fee examiner appointed by U.S. Bankruptcy Judge Steven Rhodes to ensure that Detroit’s fees do not become exorbitant, charged $28,407.85, according to a bankruptcy filing (an hourly rate of $600.). The Detroit Free Press reports that consultants and attorneys hired to guide the city through municipal bankruptcy and restructuring have already secured contracts value at over $62 million. The resources expended in fighting over the insolvent city’s fate will sharply erode what will remain to meet the legal and human needs of a reconstituted city.

Motor City Downgrade. In the wake of Emergency Manager Kevyn Orr’s decision not to make full faith and credit g.o. bond payments due today, Fitch Ratings yesterday downgraded Detroit’s bond rating—underscoring how difficult it will be for Detroit to regain Wall Street’s trust following the city’s Chapter 9 bankruptcy—and how much the municipal bankruptcy filing may increase the city’s borrowing costs. The Motor City had been scheduled to make interest payments on $411 million in unlimited tax general obligation bonds and $202.8 million in limited-tax general obligation bonds today. The city had already stopped making payments on its $1.5 billion in pension obligation certificates of participation; Detroit is continuing to make payments on interest-rate “swaps” that are currently being treated as secured obligations in court. In lowering the city’s credit rating from C to D, Fitch stated its decision came in the wake of the city’s “publicly announced intention to default on the scheduled interest payments on limited and unlimited tax general obligation bonds.”  The city is seeking to borrow up to $350 million to pay off its pension debt swaps and reinvest in city services.

Taking Stock in Stockton. The city of Stockton has released a draft of its plan for exiting Chapter 9 bankruptcy, which it expects to file in federal bankruptcy court in early October, with a portion reading: “The plan is a Spartan one…It returns the city to financial and public service provider solvency, but, in the absence of agreements with city creditors whose obligations are secured by leases of city real estate, the plan includes the potential loss of city control of certain city properties.” The release of the plan came in the wake of Stockton’s negotiations with 18 sets of creditors, including bondholders. Those include its employee unions as well as other stakeholders Dexia Credit Local, Union Bank and the U.S. Department of Housing and Urban Development. As part of the plan, the city agreed to resume lease payments on $45.1 million of NPFG-wrapped obligations for the city’s sports arena, and $43.7 million of debt secured by parking garages, thus guaranteeing continued city control of the properties, according to the draft plan. The plan is still unresolved on the all-important pension issue, because the city is still negotiating with Assured Guaranty over $124.3 million of insured pension obligation bonds, which are unsecured. In addition, the city yesterday said it had not reached an agreement with Franklin Advisers, Inc., Franklin High Yield Tax Free Income Fund, and Franklin California High Yield Municipal Fund, which together own around $35 million of the city’s lease revenue bonds. If the city is able to work out its remaining issues, it could help the city emerge from federal bankruptcy early next year. Should the negotiations succeed in avoiding a fight over what would be “fair and equitable,” it could well mean, as the fabulous Matt Fabian of Municipal Market Advisors notes: “[T]his could mean that the relative priority of [the California Public Employees’ Retirement System] in a Chapter 9 bankruptcy may remain murky since it would not be subject to a court decision.” The city’s draft plan would not impair the city’s obligations to CalPERS for pensions, with its drafters noting: “The maintenance of pensions is critical to the city in order to retain employees — particularly police officers — rather than losing them to other local governments, all of which have defined benefit pension plans, and the overwhelming majority of which have pension plans administered by CalPERS.”  Stockton’s draft plan would, however, impair retiree health benefits: retirees would be paid a portion of their claims equal to the unsecured claim payout percentage of 0.94796%. Current employees of the city also agreed to forgo health benefits in retirement, which reduces their post-employment benefits by 30% to 50%, according to the city’s estimates. Stockton estimates that the elimination of retiree health benefits could mean as much as $1 billion in savings. The city notes that its proposed plan depends on the passage on November 5 of a ballot measure to impose a .75 cent tax increase; so that should the measure fail to pass, the plan’s projections will not be achievable—or, as the draft plan states: “Not only will the city be unable to fund the plan, but it will be unable to pay its current operating costs. The result will be further and significant staff and service reductions, reaching across virtually all city departments.” The city council will take up the draft in a special meeting on October 3; the council must authorize City Manager Bob Deis to file the plan in court, where it must then receive approval from U.S. Bankruptcy Judge Christopher Klein.


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