10.9.13

Motor City Stutter Steps. U.S. Bankruptcy Judge Steven Rhodes signed an order yesterday prohibiting labor union attorneys from asking Gov. Rick Snyder for the names of the other Detroit emergency manager candidates during a sworn deposition today, but allowed a grieving mother, Ms. Deborah Ryan of Canton Township, suing the city of Detroit over the murder-suicide death of her daughter to proceed with her lawsuit (Ms. Ryan alleges the Detroit Police Department failed to protect her daughter from an unstable husband)—unless the Detroit city law department comes up with a plan to clear all pending litigation within 35 days. Ms. Ryan’s is one of 500 cases against the city that has been staid since Detroit filed for municipal bankruptcy last July. Judge Rhodes yesterday gave Detroit five weeks to come up with a plan to address the 500 pending cases, noting: “It is clear enough from the testimony of the witnesses … that neither counsel for the city nor management of the city has yet spent any time focusing on this very issue of what should the process be to liquidate these claims. Or at least if any time has been spent on this issue, that certainly did not come through the testimony.” Detroit city attorneys had opposed lifting the stay order on Ms. Ryan’s lawsuit, fearful it will open the floodgates for multiple suits against the city.

Oyez, Oyez, Oyez. Attorneys for Detroit retirees, the United Auto Workers, and the American Federation of State, County and Municipal Employees reached an agreement late Monday with the Michigan Attorney General’s office, which had sought to shield Governor Snyder from being deposed. The UAW, AFSCME, and retiree attorneys, who are objecting to Detroit’s eligibility for bankruptcy and who have been seeking the names of other candidates whom the Governor might have considered naming as Emergency Manager for Detroit, agreed to the state’s stipulation that documents containing the names of the other candidates be redacted when they are turned over to the objectors. Judge Rhodes’ order gives the UAW and a group of retirees the right to seek a court order at a later date to force disclosure of the other EM candidates’ names, which could be used contact the candidates to “interview as potential eligibility trial witnesses,” according to the court order. Michigan reserved its right to oppose such a move. Judge Rhodes’ order also protects Treasurer Dillon and Richard Baird, whom some have dubbed “the most important man you’ve never heard of,” (He is described as Gov. Rick Snyder’s right-hand man, and a key player on a number of decisions that affect the city of Detroit.) from being asked to disclose the EM candidates’ names. Mr. Baird recruited Washington, D.C., bankruptcy attorney Kevyn Orr to be Detroit’s emergency manager, while State Treasurer Dillon chairs the state panel that technically hired EM Orr. Unions and retiree groups opposed to Detroit’s eligibility for bankruptcy protection have been seeking to depose Gov. Snyder, Treasurer Dillon, and Mr. Baird in hopes of proving the Governor’s administration planned to take Detroit to bankruptcy court months before Kevyn Orr was even appointed emergency manager. A prerequisite for Judge Rhodes to find Detroit eligible for Chapter 9 bankruptcy is proving Kevyn Orr negotiated with creditors in good faith before the July 18th filing.

Planting the Flag. San Bernardino must reduce labor costs and fundamentally change how it delivers services if it is to become financially solvent in the long run, Mayor Patrick Morris yesterday warned in his annual State of the City address. Mayor Morris said the city must address a projected $360 million General Fund deficit over the next decade, proposing that such savings could be achieved by contracting out most public services, closing four fire stations, extending the utility users’ tax, and restructuring debts: “The purpose of presenting these specific actions…is to plant the flag and creating a starting point for a very serious discussion, during a time-compressed window, to adopt a plan to save San Bernardino.” In his remarks, Mayor Morris recapped how San Bernardino became the third city in California to become eligible for federal bankruptcy protection a year ago last August; the Mayor is not seeking re-election to a third term in November, but is nearing U.S. Bankruptcy Judge Meredith Jury’s Oct. 15 deadline for the city to submit a draft plan declaring how it will treat thousands of creditors to which it owes millions of dollars. Mayor Morris described that the city currently spends nearly three-fourths of its General Fund budget on labor costs, most of which goes to police and fire salaries, health benefits, pensions and retiree health benefits: “These pensions and retiree health care benefits are consuming greater and greater portions of the General Fund and costing the city tens of millions of dollars that could have been used to provide vital services and maintain public infrastructure.” In order to meet escalating labor costs, he said the city stopped taking care of streets, sidewalks, medians, parks and public buildings—San Bernardino, he told the audience, was using the Redevelopment Agency to backfill the General Fund for basic infrastructure fixes; however, the state’s elimination of redevelopment left the city with almost no funding to spend in that area. The Mayor said that by paying its creditors and deferring $25 million in debts, the city has been able to pay its current bills, but it remains financially unhealthy and cannot afford to deliver basic services. He said San Bernardino could recover by having other public agencies deliver police and fire protection instead of performing them in-house, but offered no specifics. Public safety costs could, he stated, be controlled by asking voters to repeal a section of the city charter that provides automatic yearly salary adjustments for police officers and firefighters. In addition, he identified four fire stations – Verdemont, Highland/Orange, Rialto Bench, and Mill/Arrowhead – that could be closed, because, he said, they have the fewest service calls, and other stations or agencies could respond; but he warned the city should not reduce its workforce any further, except for the fire department: recommending that his successor and other elected leaders must negotiate “vigorously and aggressively” with labor groups to reduce salaries, benefits and pensions if contracting out services fails to produce the expected savings. Mayor Morris said the city could generate about $6 million in annual revenues by extending the utility users tax to water, sewer and trash bills, and contracting out refuse service to a private company.

Overcoming Hurdles to Exiting Municipal Bankruptcy. Jefferson County Commission President David Carrington yesterday said the chapter 9 county’s creditors in its $4.2 billion chapter 9 municipal bankruptcy have “overwhelmingly approved” the county’s plan of adjustment. A group of creditors, which included pension funds and individual investors had until Monday night to submit their votes on a chapter 9 recovery plan approved last August by U.S. Bankruptcy Judge Thomas Bennett. Mr. Carrington said the final count will come later this week. JPMorgan Chase & Co and Bank of New York Mellon had previously signed off on the plan, which will include losses of as much as 70 cents on the dollar. The final negotiated plan promises to deliver only $1.835 billion of the promised $3.078 billion to sewer-system warrant holders. Approval by the creditors paves the way for a year-end bond sale of about $1.9 billion—needed to pay off current sewer debt bondholders at sizable discounts. Jefferson County has also reached agreements covering defaulted school warrants and other non-sewer debt.

Innovative & Playful Bankruptcy Recovery. Central Falls, Rhode Island, a successful emerger from chapter 9 municipal bankruptcy, nevertheless finds its municipal bonds still rated junk-grade. Nevertheless, the tiny municipality is seeking donations online for a park project with help from a so-called crowd-funding platform. The 19,000-population city, which exited Chapter 9 a year ago this month, hopes to raise just over $10,000 to buy five steel trash cans and recycling bins for Jenks Park, adjacent to City Hall, and fashion the bins as art pieces, or, as Mayor James Diossa states: “We look at Jenks Park the way New Yorkers look at Central Park.” The fundraising drive began last week; Central Falls or Chocolate City is teaming with Citizeninvestor Inc., a platform that includes East Providence, R.I., attorney Tony DeSisto, who co-founded the company to provide alternatives to civic projects while working on the Citizen Advisory Committee of Tampa, Fla. Other Citizinvestor projects posted on the company’s website include an enclosed dog park in Framingham, Mass., a community garden at Philadelphia’s Rivera Recreation Center and fire rings at Memorial County Park in San Mateo, Ca. As of yesterday, the city has raised $1,125, with 45 days remaining to attain a goal of $10,044. While under chapter 9, Central Falls restructured its pension debt, resulting in cuts of up to 55% for police and fire retirees; the city emerged from bankruptcy protection with a six-year balanced budget. Mayor Diossa notes that “The bankruptcy process left the city short-staffed and left many municipal projects unfunded…We’re looking for ways to be innovative. I’d like to see this project serve as a model for other cities in Rhode Island.” The Mayor, who turned 28 in August, won a special election last year after Rhode Island officials restored local control. He will run unopposed next month for re-election. He is a Central Falls native and the son of Colombian immigrants.

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.”

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