Motor City Depositions. Attorneys for Motor City labor unions yesterday took nearly three hours of deposition from Michigan Gov. Rick Snyder with regard to why he authorized Detroit’s historic bankruptcy filing and whether he believed employee pensions should be slashed in the debt-cutting process—likely making Governor Snyder the first Wolverine governor in modern history to testify under oath while in office. The attorney for the unions noted: “We appreciate the fact that he appeared for a deposition, it’s highly unusual…To that extent, we’ve gotten more information than we had before. But the fact that we still don’t really fully understand what comes next and if there’s a safety net that’s being thought about for the retirees is still of concern.” Attorneys representing the United Auto Workers, AFSCME Council 25, and city retirees sought to learn the details of the decision-making that led to Gov. Snyder’s July 18 authorization for Detroit to file the largest municipal bankruptcy in U.S. history. Under the state’s emergency manager law, Detroit’s Emergency Manager Kevyn Orr had to seek Gov. Snyder’s permission to file for chapter 9 municipal bankruptcy. The retirees and unions are challenging Detroit’s eligibility for bankruptcy on grounds that it could lead to the slashing of earned pension benefits for the city’s 23,000 in violation of Michigan’s constitutional protection of pensions. Subsequent to the deposition, Gov. Snyder released a statement, noting: “Authorization of the Chapter 9 filing was a difficult but necessary decision — one that clearly was the last and only viable option to resolve the city’s fiscal crisis and restore the greatness of this proud city,” Snyder said in the statement. “I am convinced that it will spur the turnaround and complete the comeback of our state’s largest city, and ensure a vibrant, thriving Detroit and Michigan for generations to come.” Depositions will continue today, with State Treasurer Andy Dillon and Rich Baird, an aide to the Governor, while outgoing Mayor Dave Bing, who has largely been sidelined since Mr. Orr was appointed EM, is scheduled to be deposed Monday in Detroit by the bankruptcy objectors.

Planting the Flag.  The San Bernardino City Council has voted 4-3 to reject a proposal by Councilman Fred Shorett to ask other agencies including Cal Fire and the San Bernardino County Fire Department to submit proposals for how they might be able to protect the city for less than the city’s Fire Department does. The proposal, by which the councilman hoped to save the city $12 million a year, noted:  “I as a representative of the people of San Bernardino owe it to the taxpayers to deliver smarter, cheaper services.” Mayor Pat Morris spoke in support, but City Attorney James F. Penman said that in his opinion and that of the city’s bankruptcy attorney it was not the right time for such discussions: “It would be premature to start this process outside of the mediation process,” adding that he agreed the city needed to look at all options and he would be willing to examine — “and I stress ‘examine’” — outsourcing proposals later. Mayoral candidate Matt Korner said San Bernardino should consider combining the police and fire departments, and should also consider any options from outside agencies: “With public safety representing 80 percent of the budget, I think Fred Shorett, his proposal is perfectly reasonable, and I don’t know why anyone would oppose finding out how much it would be.” According to a presentation the city’s financial consultant, Michael Busch of Urban Futures, police account for 50% of the city’s labor costs and fire 31%. Those numbers include responsibilities added to those departments as part of financial restructuring in the last year. But Paul Sanborn, who is running next month to replace Councilmember Wendy McCammack if she’s recalled from the 7th Ward, warned the proposal risked lowering its standards dangerously: “For the firemen and the police, if you start doing that and you kick them out, I’ll tell you what you’re going to get: rejects.” In a related proposal, some councilmembers have asked the Sheriff’s Department for a proposal to police the city―with negotiations undertaken by City Attorney Penman, who noted it was necessary because of the status of the city’s bankruptcy case at the time.

Federalism & Aggravating Factors. The sharp reduction in state aid to cities in California, the state’s realignment of public safety tasks—shifting the fiscal burden of prison costs to California local governments, and the dissolution by the state last year of redevelopment agencies have all been exacerbating and contributing factors to San Bernardino’s bankruptcy, and the chapter 9 city’s efforts to use its bankruptcy case to win a dispute with the state over its shuttered redevelopment agency have so far been to no avail. The Golden Bear state shut down redevelopment agencies in 2012, and says San Bernardino inappropriately held on to $15 million that belonged to the former city redevelopment agency. Adding to its fiscal despair, U.S. Bankruptcy Judge Meredith Jury last month ruled that the city and the successor agency to its redevelopment agency are separate entities, making it a non-bankruptcy court issue; rather, Judge Jury wrote that if the successor agency had a dispute with the state’s Department of Finance, it should take the issue to state court. Nevertheless, Judge Jury left the door open for the city to file before her a second time, which the city has—with Judge Jury yet to rule on the second filing, while the California Department of Finance filed an appeal Tuesday with the U.S. Ninth District Court of Appeals arguing that Judge Jury does not have jurisdiction on the issue. This hurdle reared its head last spring, when the city’s Department of Finance advised the city’s successor agency that it had to pay $15 million to San Bernardino County to be redistributed to the school district, special district, the city, and every municipal entity that receives a split of property taxes. This is another means by which the state benefits at the expense of its local governments: the more revenues school districts receive locally, the less the state has to allocate under an equalization law that insures all the state’s school districts receive the same level of funding. Subsequently, the state also threatened to dock the city’s sales and property taxes to pay the $15 million if the successor agency refused to transfer the revenues. In the city’s lawsuit, San Bernardino City Attorney James Penman claims the disputed amount only involves $300,000 in cash, and the remainder concerns real estate assets. Moreover, as Mr. Penman noted, the insolvent city does not have the money to give the state, and claimed in the city’s filing that state officials violated federal bankruptcy code by making the claim: “The city is protected by the ‘automatic stay’ provision of the bankruptcy code, which prohibits creditors and other third parties from taking actions against the property, assets, monies, funds/and or other interests of the city without first obtaining bankruptcy court approval of such actions.”

Overcoming Hurdles to Exiting Municipal Bankruptcy.  Even though Jefferson County Commission President David Carrington Tuesday 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 new hurdle reared its head yesterday when a former financial advisor to the County alleged that Citi, the investment bank selected to lead Jefferson County, Ala., out of bankruptcy, violated municipal securities rules, claiming the County’s recovery or municipal bankruptcy exit plan “violates current securities law and specifically Rule G-23 of the Municipal Securities Rulemaking Board by virtue [of] the county’s selection of Citibank as managing underwriter for the proposed sewer warrant refinancing.” (MSRB Rule G-23 prohibits a dealer that acts as a municipality’s financial advisor from being the underwriter for that issuer on the same transaction.) The new snag could impact Jefferson County’s ability to pay debt service in the future—an issue that could have severe fiscal implications, as some portions of the county’s existing sewer system are nearing the end of their useful life—and the new claim could interfere with the County’s post-bankruptcy needs to go to the bond market for additional funding if needed. These issues are expected to come to a head next month, when U.S. Bankruptcy Judge Thomas Bennett has scheduled the confirmation hearing on the county’s plan of adjustment.

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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