10.8.13

Taking Stock in Stockton. Moody’s has raised questions about Stockton exit plan, or plan of adjustment to emerge from chapter 9 bankruptcy. Because Stockton’s plan seeks to completely protect and honor its pension obligations, the issue has been how to give “haircuts” on its outstanding bonds. The city has settled with all three of the insurers of its outstanding lease-backed and pension obligations, which cover almost 90% of Stockton’s outstanding debt supported by the city’s unconditional repayment promise — its pension obligation bonds — and those conditioned on the use or occupancy of the leased assets. The critical focus of the plan is the preservation of assets deemed essential to the post-bankruptcy functioning of the municipality, especially essential services such where outstanding bonds are secured by leases covering important city functions, such as fire, police, and other administrative functions. Ergo, bonds secured by revenues of parking structures, Stockton’s arena, and rentals to an office building that includes its city hall receive lower recoveries, according to Moody’s. At the bottom of the barrel are bonds secured by leases on the city’s golf courses and park, where the city proposes about a one percent recovery. Under the plan, there would be no haircut for water, sewer, and special tax bonds. Stockton has no outstanding general obligation bonds. The pressure on the city’s outstanding bond indebtedness is forced upon it in order to ensure that the California Public Employees’ Retirement System or CalPERS remains an unimpaired creditor. But even there, there have been no final decisions about whether accrued unfunded pension liabilities can be restructured, or, as Moody’s wrote yesterday: “Under Stockton’s plan, the unfunded accrued pension liability of its retirees remains untouched, and the city will continue to fully fund its required contribution to CalPERS…We estimate that the city’s unfunded accrued pension liability, from both pension plans held by CalPERS, is approximately $500 million.” Exiting chapter 9 successfully, this, means the city’s voters not only will have to approve a .75 cent sales and use tax increase in November, but also that the city will have to continue to include its share of current year accruals and an amortization component, which is based on an unfunded liability as it currently exists. And Moody’s has identified the amortization requirement as a main driver of the city’s pension cost over the last five years. Moreover, Moody’s wrote that should the city’s exit plan not be approved, the municipality could be forced to restructure its pension obligations. It isn’t going to be over until it’s over.

Innovative Regional Fiscal Initiative. The Detroit City Council meets today to discuss the proposed agreement with the state for the lease of Belle Isle and the potential for alternative plans, with Council President Saunteel Jenkins requesting councilmembers to offer any recommendations in advance of a special session on Friday to vote on the lease. The council has until next Monday to decide if it will accept or reject the agreement between Emergency Manager Kevyn Orr and Michigan Governor Rick Snyder. Under the 30-year lease agreement for the city to lease the island as a state park, there would be two 15-year renewal options, resulting in projected savings to Detroit between $4 million to $6 million each year. Should the council reject the lease, it has one week to propose an alternative plan to save the city as much or more money, according to the state’s emergency manager law. The state Emergency Loan Board will make the final decision. As of yesterday, no alternative proposals had been submitted.  Should the Council ok or opt not to offer a counter proposal, Gov. Snyder’s three appointees on the state loan board would have 30 days to pick the winner based on which proposal “best serves the interest of the public in that local government.” Both the November Mayoral candidates, Mike Duggan and Benny Napoleon, have expressed views, with Mr. Duggan last week announced he was assembling a team to develop an alternative and stating he would be “actively engaged” with the council—and vowing he would submit a plan that matches the financial numbers that state leaders put forward last week. Candidate Duggan, the former Detroit Medical Center CEO, stated he is urging council members not to reject the lease outright, but to push for the island to be run by Detroit. Candidate Napoleon, Sheriff of Wayne County, has also criticized the deal with the state, arguing a qualified entrepreneur could lease Belle Isle from Detroit, an avenue he has said would create job opportunities for city residents. Nevertheless, neither candidate, as of yesterday, had submitted a formal alternative proposal for the Council to consider. Under the current agreement, the state is expected to seek grants to invest $10 million to $20 million in the park’s infrastructure and would require $11-a-year Recreation Passports for vehicles entering the park   ffective Jan. 1, 2014. Pedestrians, bicyclists and individuals using public transportation could get onto the island for free. The city would still own Belle Isle, but the park would be managed by the state Department of Natural Resources. The Michigan Department of Transportation would care for the island’s roads and bridges.

Hurdles to Exiting Municipal Bankruptcy. If getting into municipal bankruptcy is a time consuming and expensive process, it turns out that getting out of chapter 9 can be equally challenging. Thus it was that last Friday a group of the county’s sewer system ratepayers filed a complaint with U.S. Bankruptcy Judge Bennett, objecting that the County had failed to properly inform residents and sewer system ratepayers about its chapter 9 exit plan. Their complaint objects to the process, claiming that “the plan of adjustment is deficient, unfeasible [and] not grounded in sufficient fact or legal bases, and [it] cannot be confirmed as proposed,” and that the county failed to detail its methodology for new sewer rates, explain the roles financial institutions played in past corruption “that led to the county’s current financial state,” and failed to compare financial concessions being made by sewer system creditors versus illegal funds received by those involved in the sewer system financing. The objectors wrote that Jefferson County failed to disclose any recent financial details, and noted that the proposed plan of adjustment only includes financial data from fiscal 2011, which ended on Sept. 30: “There is no way of knowing whether any of the undisclosed assumptions made for the financial projections are either true, reasonable or reliable…Likewise, without such information there is no way of knowing whether the financial costs associated with this plan are accurate or even reliable given the absence of financial data from Jefferson County.” The group, which filed a civil suit in 2008 when it filed a civil suit in local court against current and former county officials, investment banks, underwriters, bond insurers and others who were convicted of corruption in rebuilding the sewer system and financing improvements. Jefferson County leaders are tentatively scheduled to meet this week with the sewer system creditors in New York—most of whom have accepted a recovery rate between 65% and 80% of their investment, with the lower rate going to creditors who opted to keep insurance wraps on their warrants. Because interest rates have increased since the original plan was announced several months ago, Jefferson County is asking the creditors for additional concessions.

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.”