10.7.13

Taking Stock in Stockton. The Stockton City Council last week approved the city’s plan to exit bankruptcy after reaching agreement with bond insurer Assured Guaranty to restructure more than $150 million of outstanding debt. City manager Bob Deis will next file the plan in In U.S. Bankruptcy court before Judge Christopher Klein. The agreement with Assured marked the end of a long and difficult struggle between the municipality and its biggest bond insurers—especially because Stockton had proposed imposing losses on municipal bondholders in order to leave pension payments intact. According to Mr. Deis, Stockton has now reached agreement with all but three of its creditors, clearing the deck for filing its plan for adjusting its debt to exit from bankruptcy as early as today or tomorrow. Under the agreement reached with bond insurer National Public Finance Guarantee over about $45 million in outstanding lease revenue bonds for the city’s arena, Stockton will reduce payments for the arena bonds by 3%; other bonds insured by National and related to parking garages will be cut by 12%. A third tax-exempt municipal bond for a city building will be paid in full. Under the agreement, Assured will take possession of a city building and receive the revenue it generates to service about $35 million in outstanding bonds the city had sold to acquire the building. The step was key in preserving the revenue so that Stockton can make payments on about $120 million in outstanding pension obligation bonds until 2052 from their original 2038 term. The agreement with Assured carries two key conditions: 1) confirmation from the U.S. bankruptcy court, and 2) that Stockton voters approve a sales tax increase in November to enhance the city’s fiscal situation and provide for additional police officers. Absent the new revenues, Manager Deis advises Stockton would need to cut $11 million in spending, which could fall on libraries, community centers and fire houses. Stockton’s route to municipal bankruptcy and emergence is markedly different than Central Falls, Detroit, and San Bernardino, in that the city sought to protect its promises to pensioners. In that decision, it received at least moral support from the California Public Employees’ Retirement System, which had indicated—unlike its battle with San Bernardino, it (CalPERS) was prepared to help the city battle its bond insurers in court. Nevertheless, Stockton expects pension savings due to concessions from employee groups and changes in state law. The city had sought to protect its promised pension payments as key to  retaining and recruiting employees—but also by noting pay and benefit concessions by employees and the elimination of the city’s post-retirement health care benefits for about 1,100 of its retired employees.

Innovative Regional Fiscal Initiative. In a proposed regional plan that could provide Detroit with a secure revenue stream, Michigan state and local leaders are seeking to fast-track the creation of a regional authority to take over the Detroit Water and Sewerage Department. If successful, the effort could leverage millions in annual revenues for the city. Emergency Manager Kevyn Orr has been working with regional officials and water department board members on a plan. Under the plan, such a new, regional authority would own or lease the department, collect revenue from water bills, and make payments to the city: annual revenues for Detroit could range from $60 million to $120 million. This might be a good place to commence, as the Detroit water department, which is undergoing a major downsizing with a goal to reduce its workforce by 80% by 2017, is considered one of the city’s most stable sources of revenue. Nevertheless, the creation of a regional authority, because it would involve potential state legislation and hard questions of governance and finance—there are 120 municipalities in the Detroit metropolitan area—promise major, if not insuperable, challenges.  But the rewards could come not only in efficiency, but also through unique provisions in Wolverine law, which bar municipal water systems in the state from charging more for water and sewer services than costs: by converting to a regional authority, Detroit would be able to receive revenue through the lease, not through water sales. State Rep. Kurt Heise (R-Plymouth Township) has introduced bills calling for a regional authority. House Bill 4009, proposed last January, would incorporate the department and have over 100 members — one each from the 126 municipalities served; but Rep. Heise opposes the plan being considered by Orr and the current water and sewerage board: “It is my opinion as a legislator and as a municipal lawyer that the three counties do not have the authority to bind the members of the Detroit Water & Sewer District.” Instead, Rep. Heise believes state legislation would be required to properly create an authority. Detroit’s water and sewer department currently has approximately $5 billion in outstanding debt: its water debt is considered its soundest debt. Mr. Orr’s office believes that an authority involving Wayne, Oakland, and Macomb counties would allow for water department bonds to be refinanced at a much better rate, with Wayne County Commission Shannon Price noting: “The new authority could refinance all the bonds at a much lower rate, which obviously would be a huge cost savings right there.” Commissioner Price, a Canton Township Republican, is chairman of a newly formed commission water board task force. But in a sign of what an extraordinary challenge this initiative would be, Dearborn Mayor Dan Paletko warned that any attempt at selling the treatment plant would be met with swift legal opposition. Mayor Paletko is chairman of the committee that oversees the plant — the Downriver Joint Management Committee. The Mayor notes that while Wayne County owns the land, some 13 municipalities have some ownership claims, having made some $300 million in improvements to the plant over the years.

Motor City & Michigan’s Emergency Manager Law. U.S. Bankruptcy Judge Steven Rhodes does not seem to ever rest. His agenda this week will not include trying to be a referee over the potential new water-sewer authority, but  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.

Federal Shutdown’s Impact on Municipal Bankruptcy Proceedings. The unending shutdown of the federal government, 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.”

Corruption of Public Trust & Solvency. This Thursday, former Detroit Mayor Kilpatrick will be sentenced for 24 convictions of corruption—a tour of seven years’ of public corruption schemes, a lavish lifestyle at municipal taxpayers’ expense, and ethical abuse of the public’s trust. With estimates that his corruption of municipal responsibility added at least $20 million in debt over his terms in office, it is unlikely anyone will ever be able to determine how much his extortion, kickback, and bribery rackets triggered the historic city’s fiscal crisis and the nation’s largest municipal bankruptcy in history. In their court filings, federal prosecutors noted: “Kilpatrick is not the main culprit of the city’s historic bankruptcy, which is the result of larger social and economic forces at work for decades…But his corrupt administration exacerbated the crisis.” In their litany of actions that eroded the public trust and city coffers, prosecutors estimated: an $8.4-million settlement the city coughed up in the 2007 police whistle-blower trial; $9.6 million in illegal profits from crooked water and sewer contracts; a $500,000 state grant for low income children and the elderly that was sidetracked to the Mayor’s contractor friend, Bobby Ferguson, and his wife, Carlita Kilpatrick; $210,000 from his Motor City-issued credit card—used, according to the government charges, for perks like a family trip to Las Vegas, spa visits, a hotel room for the babysitter and an $850 steak dinner. The mayor’s petty cash fund also was abused to the tune of $144,000, which covered things like Lions football tickets, a Rolling Stones concert, health club membership and $43,000 worth of meals. During his term, the government charged there were $84 million in losses to troubled city pension funds―six individuals, including Kilpatrick appointee and former fraternity brother Jeffrey Beasley, face criminal charges in that case; the former Mayor is named as a coconspirator. The federal charges include that the former Mayor padded the city payroll with friends and family, including a cousin who admitted stealing nearly $20,000 from the Manoogian Mansion restoration fund. City payroll records show that more than two dozen of Kilpatrick’s appointees were relatives or close friends who received an average 36% in salary increases while other employees received 2%.

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