10.17.13

Motor City Finances. The city of Detroit’s revenue continued to slide during its first quarter since filing for chapter 9 bankruptcy, but its cash flow improved, putting the city in a better financial position, even as it heads toward a dramatic confrontation with its creditors. Detroit Emergency Manager Kevyn Orr released a report on Motown’s financial condition to outgoing Michigan State Treasurer Andy Dillon late yesterday describing the condition as “dire,” but finding that cash flow has improved during the first quarter: “The financial condition of the city of Detroit continues to be dire,” Mr. Orr wrote. The report illustrates the worsening of the city’s revenue plight, likely enhancing the city’s argument that it is insolvent, a key criteria in determining whether the city is eligible for Chapter 9 bankruptcy. U.S. Bankruptcy Judge Steven Rhodes commences the eligibility portion of the bankruptcy trial next week to decide whether Detroit’s case can proceed. . Revenue fell 9% though the city had an unrestricted cash balance of $128.5 million during the quarter ending Sept. 30th. The increase can mostly be attributed to the city’s halt in paying unsecured municipal bond debt and withholding $44 million in payments to two pension funds. Property tax revenue fell more than 17% during the quarter to $51.5 million, while the city’s income tax revenues fell almost 5% to $50.9 million. Total general fund revenue was $220.2 million. Tax revenues from the city’s three casinos dipped almost 4% to $43.7 million. Detroit filed for chapter 9 municipal bankruptcy on July 18, less than three weeks into the quarter, in a move aimed at helping the city chart a financially sustainable path. Mr. Orr’s quarterly report also disclosed that Detroit’s work force has declined about 10% over the last year, or about 1,000 fewer employees than it did year ago. The city had 9,322 as of Sept. 30. The city is projecting a net unrestricted cash balance of $46.8 million at the end of the next quarter, although that figure does not include the possibility of the new financing agreement and swaps settlement.

Motor City Depositions. In the second day of hearings before U.S. Bankruptcy Judge Steven Rhodes on issues related to Detroit’s eligibility for bankruptcy, Judge Rhodes questioned Michigan Assistant Attorney General Margaret Nelson with regard to whether the Michigan Legislature had made “a mockery” of the referendum process when it passed a new emergency manager law a month after voters rejected the law last November. Because some of Detroit’s creditors have challenged the legality of Emergency Manager Kevyn Orr’s appointment in an attempt to get the case dismissed, they have been pressing Judge Rhodes to consider every aspect of the law, Public Act 436, which provides the authority in the state for a municipality to file for bankruptcy. Thus, Judge Rhodes asked: “What’s the point of giving people the power of referendum to reject a statute if the constitution is read to give the Legislature the power to re-enact word-for-word the same statute voters just rejected?” To which the Assistant Attorney General responded: “That becomes a political issue. Do voters want to keep those legislators in office?” That prompted a follow-up from Judge Rhodes: “Why put the people to that? The people spoke. Here is the substance of that right of referendum that the constitution gives the people if the Legislature has the authority to thumb its nose like that?” Ms. Nelson replied that Michigan voters still have “the right of referendum” against the new emergency manager law, even though Public Act 436 contained a $5.78 million appropriation that legal experts and lawmakers say makes it immune from a voter-initiated referendum. The funding was tacked onto the bill to pay for emergency manager salaries, attorneys, and financial consultants working for the state Treasury Department in financially distressed cities, according to Ms. Nelson, who added she disagreed with his assessment that the Legislature has made “a mockery” of the referendum process. Ms. Nelson asked Judge Rhodes to uphold the law and said Detroit’s bankruptcy case would fall apart if Mr. Orr were removed from office: “That would necessarily terminate the case because it would revert back to local officials, and they would have to either reinitiate the process or somehow continue the case.” Creditors, including Detroit’s two pension funds and Michigan Council 25 of the American Federation of State, City and Municipal Employees, have challenged Detroit’s eligibility for bankruptcy, claiming Gov. Rick Snyder should have forced Orr to save public pensions during the bankruptcy because the Michigan Constitution protects public pensions from being reduced by the state. Michigan Attorney General Bill Schuette has argued that pensions cannot be reduced in bankruptcy court but that the city’s bankruptcy case should nonetheless be allowed to proceed. Counselor Nelson said it “doesn’t matter if the governor chose not to impose contingencies,” since pensions haven’t been reduced yet.

Michigan’s Emergency Manager Law. Michigan Assistant Attorney General Nelson defended the constitutionality of the state’s emergency manager law, disagreeing with arguments from objecting parties that the law, Public Act 436, is identical to the law (Public Act 4) repealed by voters. She said the new law requires more involvement in decision-making from local leaders compared to the previous emergency manager act, which was criticized as undemocratic. The new law also includes options for cities to avoid the appointment of an emergency manager, although Detroit was not afforded those options when Governor Snyder installed Emergency manager Orr days before the new law took effect under a 1990 law, Public Act 72: Mr. Orr was grandfathered into the new law, allowing his appointment to bypass the scrutiny of the Detroit City Council. The Republican-controlled Legislature rushed a new emergency manager law to Gov. Snyder’s desk during the December lame-duck session over vehement objections from Democrats who said the chambers’ GOP majorities were ignoring the will of the people. Governor Snyder and GOP lawmakers have said they passed a new law in response to voter concern that the previous emergency manager statute too broadly stripped local officials in financially distressed communities and schools districts of their power to govern. In addition, Governor Snyder maintained that just because Wolverine voters voted down his first emergency manager law, that did not end financial emergencies in Detroit or other cities and school districts. The new law contains a mechanism for local officials to offer alternative proposals for contracts costing more than $50,000, so that, for instance, Detroit’s City Council exercised this option this week when it voted unanimously to reject the state’s proposed 30-year lease of Belle Isle to the Michigan Department of Natural Resources to convert the island into a state park. Under the new law, City Council’s counter-proposal for a 10-year lease with two 10-year extensions will be decided by the state’s Emergency Loan Board, a three-person panel of the Governor’s appointees.

The judge adjourned the proceedings at their close yesterday until Monday afternoon to give attorneys for labor unions, retiree groups and the city’s pension funds more time to prepare their rebuttals.

Campaigning to Get Out of Municipal Bankruptcy.  Even as San Bernardino—like Jefferson County, Stockton, and Detroit—is seeking to adopt a recovery plan to successfully get out of municipal bankruptcy, next month will mark a significant change with the mayor not running for re-election and likely changes in the make-up of the council. Thus some in the city were disappointed last week that only two members of the city council were present at Mayor Pat Morris’ State of the City address last week, where he spoke in plain language the scope of the city’s “financial nightmare,” which a new mayor and council will now have to figure out how to fix. Unfortunately, a Chamber of Commerce forum the same evening kept most mayoral candidates away, so that only two council members — Fred Shorett and Virginia Marquez — attended. Mayor Pat Morris blamed the council for “lavishly endowing employee salaries, benefits and pensions…and draining the general fund of money needed for vital services.” He blamed public-safety unions for taking control of city politics with hundreds of thousands of dollars in campaign funding, making elected officials beholden to them and corrupting labor negotiations. He lamented that overly generous salaries and benefits depleted the general fund and left streets, sidewalks, parks and public buildings neglected and in need of $183 million in repairs. Worse, he opined, after plundering the city’s general fund, the council voted to borrow from restricted funds, then issued $50.4 million in pension bonds, which will taxpayers cost $114 million to repay—leaving an unsupportable debt over the next decade of $360 million deficit for salaries and pensions it is already obligated to pay — even with 200 fewer employees than it had before filing for bankruptcy in August 2012.

Sewer Visitations. Jefferson County Commissioner Joe Knight will take on one of the more odoriferous local leadership responsibilities this week: guiding rating agency representatives through the County’s wastewater sewage treatment plant—a plant that is at the heart of the county’s chapter 9 municipal bankruptcy.  Representatives from New York-based bond rating agencies have been in the bankrupt county this week as county leaders work toward trying to refinance about $1.9 billion in wastewater sewer debt ahead of a Dec. 20th deadline. Among the likely sites on the tour, with Commissioner Knight as guide, are the University of Alabama at Birmingham and a sewage treatment plant, or, as Commissioner Knight reports: “We’re trying to let them see Birmingham and Jefferson County to let them know we are a vibrant community…We have some good things going on.” The county would like to make an impression on the rating agencies because the higher the rating on the refinanced warrants the more attractive the bonds are to potential investors. A favorable rating from the bond agencies can mean millions of dollars in principal payment reductions that can be used to help fill a nearly $350 million gap needed to make the county’s amended bankruptcy exit plan of adjustment work. The county’s sewer bonds are currently rated Ca, or deep in the bad smell category. The county met with Moody’s, Fitch’s, and S&P in New York last month. This week’s special subterranean tour is part of a follow-up. Commissioner Knight, not holding his nose, reports that since much has been made about the county’s sewer debt crisis, it only makes sense that part of the tour might as well include a treatment plant: “Sometimes it’s good to do more than just talk about it…Here it is. Here’s what we do.” Who knows, maybe the county will even offer to let them take the system back to New York.

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