10.2.13

Back in the Valley. Vallejo, California, which exited municipal bankruptcy on August 5, 2011, after nearly three years wading through federal bankruptcy court, and after receiving final clearance from U.S. Bankruptcy Judge Michael McManus. Vallejo might be described as a forerunner: it became insolvent early in the 2008 financial crisis, so it, in effect, served as a potential model for Central Falls, Rhode Island, Jefferson County, Detroit, San Bernardino, and Stockton. So too its current struggles could offer important lessons to those same municipalities as they seek to craft exit plans from bankruptcy. Vallejo had filed for Chapter 9 after three consecutive years of budget shortfalls that depleted the city’s cash reserves, and then, in its process of getting out of bankruptcy spent more than $10 million on attorney and consultant fees. Now, just over two years later, Vallejo is again in fiscal distress—facing a budget crisis of escalating pension costs, which were left untouched in the bankruptcy reorganization, eat up an ever-growing share of tax revenues. Ergo, much as Stockton is considering not addressing pension costs in its recovery plans, there might be important lessons learned from Vallejo. Before filing for chapter 9 protection, Vallejo’s labor contracts with police and fire unions provided that the union’s salary and benefits consumed approximately 80% of the city’s approximately $78 million budget, now reduced, post-bankruptcy, for the fiscal year that began July 1 to about $65 million. Vallejo’s restructuring of some $50 million in debt called for the city to reduce pension benefits for new employees, cut payments for retiree health care, raise pension contributions for current workers, and create a rainy-day fund. Vallejo’s largest creditors, Union Bank N.A. and bond insurer National Public Finance Guarantee Corp., along with its retirees and union members had agreed to the city’s debt-restructuring plan. The only major expense the city did not touch in its recovery plan was its payments to the $260 billion California Public Employees Retirement System, or, as Vice Mayor Stephanie Gomes notes: “We realized we did not have the time or the money to take on a giant behemoth like CalPERS.” But now city leaders appear to be second guessing that reluctance: unanticipated and increasing contributions to growing, and unexpected, costs to CalPERS are putting its post-bankruptcy budget under enormous strain. The city budget has a current deficit of $5.2 million for this fiscal year, but projects it will increase to $8.9 million next year unless significant cost savings can be found. When Vallejo entered bankruptcy in 2008, its annual employer payments to CalPERS were $8.82 million, some 11% of the city’s general fund; its recovery plan provided for payments to CalPERS in 2011 of just over $11 million, or 14% of the city’s general fund—an amount that has now increased to $15 million, or 18& of the general fund—in part because of adjustments by CalPERS to lower its projected investment return rate, from 7.75% to 7.5%, and to change the way it calculates long-term pension maturity dates. For CalPERS members—cities, counties, and state agencies—those changes can mean contribution increases of up to 50% over the next decade―Vallejo projects an increase in pension contribution rates of 33% to 42% percent over the next five years. Or, as Vallejo Finance Director Deborah Lauchner notes: “Our five-year business plan was based on things we knew…Now we have to figure out a way to pay for these new Calpers rates. Every time we react to the last rate change they impose, they come up with another one. I understand they want to improve their funding status, but it’s on the backs of the cities.”

Motor City & Michigan’s Emergency Manager Law. U.S. Bankruptcy Judge Steven Rhodes does not seem to ever rest. His agenda today includes considering several requests to unfreeze lawsuits against the city, including one filed by the family of a Detroit police officer killed by her estranged husband, a homicide detective. Judge Rhodes, presiding over the biggest municipal bankruptcy case in U.S. history, has sought to impose a fast pace for the bankruptcy case in order to preserve as much funds as possible for the city’s future, as well as to preserve assets to meet essential services. In addition to the pending suits, Judge Rhodes today will also consider a request from the city’s largest union that could revive a controversial bonus payment for retirees and workers known as the “13th check.” Finally, on his docket for today, Judge Rhodes will consider the NAACP’s request to pursue its federal lawsuit challenging the constitutionality of Gov. Rick Snyder’s emergency manager law. The lawsuit has been on hold since Detroit filed for bankruptcy last July, which halted related legal action against both Governor Rick Snyder and State Treasurer Andy Dillon.

Federal Shutdown’s Impact on Municipal Bankruptcy Proceedings. The unending shutdown of the federal government this week, which is showing no signs of progress, could now 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.”

Rethinking Physical Boundaries. In an action which apparently surprised Motor City Council members, Gov. Snyder and his transportation and natural resources directors signed an agreement yesterday with Emergency Manager Kevyn Orr to lease Belle Isle for 30 years with the possibility of two 15-year extensions. With Detroit struggling to put together a recovery plan for a city whose population has sharply declined, meaning that the city and its taxpayers bear an ever increasing burden for miles and square miles of abandoned property, the action yesterday by Michigan Governor Rick Snyder’s administration to convert Belle Isle into a state park and pump millions of dollars into repairing the island park’s ailing facilities could be a positive sign. Under the agreement, the state of Michigan will lease Detroit’s signature park for 30 years, with two optional 15-year renewals, in an agreement that will ensure at least $10 million in investment in the island’s aging infrastructure and keeps Belle Isle under city ownership, Detroit Mayor Dave Bing’s office confirmed Tuesday. Nevertheless, although both the city and state governments have signed the lease, it remains to be finalized. As proposed, the agreement, which would save Detroit at least $4 million a year in upkeep, provides ten days for the Detroit City Council 10 days to approve the lease and, if not, an additional seven days to come up with an alternative that would save an equal amount of money. If no such alternative pans out, the deal stands, Gov. Snyder’s office said. Under the proposed agreement, effective next Jan. 1, Detroiters and other state residents would be required to have Michigan’s $11-a-year Recreation Passport on their vehicles to enter the park. Pedestrians, bicyclists and individuals using public transportation could get onto the island for free. The president of the Belle Isle Conservancy said the lease agreement is “a very important step” toward keeping the park in the public’s hands at a time when city assets are being targeted for liquidation in Detroit’s historic bankruptcy. Under the state’s emergency manager law, City Council has 10 days to approve the lease. If the council rejects the lease, it has an additional seven days to suggest an alternative that would save the same amount of money or more as the state’s takeover of Belle Isle, according to a joint statement Tuesday from Snyder and Detroit Mayor Dave Bing’s offices. Mayor Bing, who has fought City Council over the controversial plan to covert Belle Isle into a state park, said Tuesday that Detroit cannot afford the upkeep on the island and the lease is the city’s best option to restore the historic park to its early 20th-century “grandeur…Detroit’s current financial condition prohibits the city from investing in the much-needed restoration of Belle Isle.” Nevertheless, yesterday’s surprise announcement did not meet open arms from the council: City Councilwoman JoAnn Watson yesterday responded: “It’s an absolute treasure, and Belle Isle is ours….It flies in the face of all the public pronouncements of the state trying to help the city. It sounds like a rape to me. It should never be touched. It’s a disgrace before God to have this outrageous seizing of an asset.” Under the proposed agreement, the city would still own Belle Isle, while the Department of Natural Resources would manage the park. The Michigan Department of Transportation would assume responsibility for the Detroit River island’s roads and bridges, according to the lease. The DNR’s law enforcement division and the Michigan State Police will assume responsibility for security on the island, freeing up 22 Detroit police officers, according to the governor and mayor’s offices.

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