Motor City Gets Ready to Rumble. A final pretrial hearing in federal bankruptcy court yesterday was like an omen of the key phase of the Motor City’s trials, as the critical phase of Detroit’s municipal bankruptcy process commences tomorrow, when the when the eligibility portion begins to determine whether Detroit will be deemed eligible for bankruptcy protection from its creditors—or, as Babette Ceccotti of the UAW yesterday noted: “We are at one of those moments that I think we will look back on and say ‘this is where Chapter 9 changed.’ ” Counselor Ceccotti was referring to the profound federalism clash between Michigan’s constitutional protection of public pension obligations and the federal chapter 9 municipal bankruptcy law. Thus, later this week, as the city begins the most crucial phase of the process, Gov. Rick Snyder could be called to the witness stand in Detroit’s bankruptcy eligibility trial, as legal maneuvering escalates in a historic case being defined by the sanctity of public pensions and the reach of Michigan’s controversial emergency manager law. During yesterday’s oral arguments over legal issues surrounding Detroit’s eligibility, U.S. Bankruptcy Judge Steven Rhodes continued to raise questions about how the emergency manager law authorizing the city to declare bankruptcy came into effect, ordering Michigan’s attorneys to produce evidence at the trial justifying why the Legislature added on $5.78 million to pay for emergency managers and consultants to a new emergency manager law — making it similar to an appropriations bill and immune to a voter referendum. As part of their efforts to derail the bankruptcy petition, Motor City retirees and unions are trying to get the Judge Rhodes to declare Public Act 436 unconstitutional, because it denies citizens their right to a referendum—a decision, which if Judge Rhodes made, could unravel the bankruptcy filing and void Emergency Manager Kevyn Orr’s appointment. Judge Rhodes could, however, just strike down the spending provision tacked onto to the law, while still finding the rest of the emergency manager law legal and the city eligible for bankruptcy.At yesterday’s hearing, Detroit’s top bankruptcy attorney, Bruce Bennett, testified the state constitution might protect vested public pensions, but the city’s financial situation is dire, telling the court that chapter 9 bankruptcy permits municipalities to cut pensions and contracts despite state constitutional protections: “You can say pensions cannot be impaired, but the reality is, at the end of the day, there isn’t enough money to pay them.” The city’s unions and the city’s pensions funds have asked Judge Rhodes to consider ruling that pensions cannot be cut before the city proposes a plan to restructure its estimated $18.5 billion in debts, but Judge Rhodes yesterday suggested that protecting the pensions at the eligibility stage may violate the federal bankruptcy code, because “It gives priority to one creditor over all others.”
Setting the Stage. Yesterday also began to set the stage for tomorrow’s key part of the city’s bankruptcy process, with the UAW having sent subpoenas to Governor Snyder, outgoing state Treasurer Andy Dillon, and gubernatorial aide Richard Baird, seeking their testimony in the eligibility phase of the trial to question the [Snyder] administration’s “motivation for Chapter 9 filings and dealings between Emergency Manager and state officials.” Michigan Chief Legal Counsel Schneider does not want the trio to testify and has offered, instead, to have their depositions available during the trial: “We do not believe the governor should testify because it is unnecessary…If he did not testify, it would speed up the trial.”Other city labor unions, retiree groups and Detroit’s pension funds want to use Governor Snyder, Dillon and Baird’s sworn depositions as testimony in the trial. Judge Rhodes, however, has indicated he prefers live testimony. It was not clear when Snyder might be called to testify. In all, there could be 15 to 16 witnesses testifying.The city anticipates its case could be finished by the end of this week; the city will open the eligibility trial by calling five witnesses, including Emergency Manager Orr, Police Chief James Craig, and financial consultant Kenneth Buckfire. Objectors indicate they hope to complete their case by next Tuesday. Judge Rhodes has scheduled additional trial dates Nov. 4-8.Judge Rhodes has advised attorneys for both sides not to file post-trial briefs, a possible signal he could rule from the bench immediately after the trial: “You should focus the full thrust of your arguments that you want to make to the court on your closing arguments.”
Motor City Depositions. In related positioning for the trial beginning tomorrow, Gov. Snyder has asked a Wayne County judge to block disclosure of internal emails and documents members of his administration exchanged last winter while deliberating over candidates for Detroit’s emergency manager. Michigan Attorney General Bill Schuette filed an emergency motion on the Governor’s behalf seeking gubernatorial intervention in a lawsuit brought by union activist Robert Davis against the state Treasury Department for documents pertaining to the emergency manager search process. Governor Snyder seeks to become a defendant in the case to “protect the other candidates for the emergency manager position from being unnecessarily burdened and harassed, and to preclude Mr. Davis from furthering his ‘fishing expedition’ and quest for media attention,” AG Schuette’s office wrote in court papers. Circuit Judge Maria Oxholm has scheduled an 11 a.m. today on the motion to intervene. Last week, Judge Oxholm ordered the Treasury Department to provide her with copies of the un-redacted records under seal, court records show.Redacted documents disclosed in the law suit reveal the Governor’s office entered into confidentiality and non-disclosure agreement last January with an unnamed man “to hold discussions regarding the possibility of the appointment of an emergency manager,” nearly a month before the state declared Detroit to be in a financial emergency. On Jan. 6, the Governor’s chief of staff approved the confidentiality agreement, according to emails disclosed in the lawsuit. A Michigan Court of Appeals panel and federal bankruptcy judge have blocked previous attempts by Mr. Davis and labor unions to force the Governor’s Office to disclose un-redacted emails related to the emergency manager search. Mr. Davis works for the American Federation of State, County and Municipal Employees Council 25, which is supporting Wayne County Sheriff Benny Napoleon, in the mayoral race. Mr. Davis assisted a court fight earlier this year to remove Sheriff Napoleon’s opponent in the race, Mike Duggan, from the ballot of the August primary, which Mr. Duggan won as a write-in candidate.Separately, Davis is awaiting trial on charges of stealing from the Highland Park school district.
White House aides in Detroit. Don Graves, the White House’s point person in overseeing on-the-ground efforts to help Detroit is going to the Motor City today through Thursday for the first of a series of regular meetings. Mr. Graves, a deputy assistant U.S. Treasury secretary, is making the trip along with David Dworkin, a housing policy adviser at Treasury. It comes after President Obama sent several cabinet officials to Detroit on Sept. 27 to announce plans to free up as much as $300 million in aid to assist the city.
Swapping Positions. The Detroit City Council this week unanimously rejected a $350 million debtor-in-possession loan that emergency manager Kevyn Orr has intended to use as part of his efforts to unload Detroit’s interest-rate swaps; the council now has seven days to propose an alternative plan that raises the same amount of revenue to the local emergency financial assistance loan board, under the state’s emergency management law.The loan board then will have 30 days in which to review both proposals and approve the “one that best serves the interest of the public in that local government.” Councilmember JoAnn Watson noted: “Why anybody would want to put the banks above the retirees is just unbelievable,” and Kenneth Cockrel asked why the Council would approve the agreement just two days ahead of crucial eligibility trial in the city’s bankruptcy. Councilmember Brenda Jones added; “We should have a deal that has all of our creditors at hand…What it’s doing is making the banks richer and the city and the retirees poorer.” Under the agreement signed last week, Barclay’s would receive a super-priority lien for Barclays on income tax and casino revenues as well as proceeds of more than $10 million on any sale of the city’s assets. According to Mr. Orr, Detroit would then use $230 million of the proceeds for termination payments on a series of interest-rate swaps that currently have a lien on the casino revenue. The city would pay the counterparties roughly 75 cents on the dollar for termination payments to shed the swaps. The remaining $120 million of the loan would be used for service improvements—provided the financing receives the requisite approval by the federal bankruptcy court.In its weekly market outlook, Municipal Market Advisors reports the loan seems to be “a very good deal for the lender and the swap counterparties, but less so for the city’s unsecured creditors and its residents…The seeming lack of a tangible recovery plan that improves Detroit’s revenues over the period of the loans renders us skeptical about the city’s ability to repay an amount of this magnitude in a short time frame without causing additional stress to the detriment of city residents and unsecured creditors that may have their recoveries tied to the city’s financial performance.”
Moody Blues Down South. Moody’s this week wrote that Jefferson County’s restructuring plan represents a novel approach in public finance in that it anticipates issuing new bonds to redeem defaulted ones at a loss to investors, an approach the rating agency wrote also being pursued in Detroit and Harrisburg, as part of its state-approved financial recovery plan.Jefferson County, which filed for Chapter 9 bankruptcy in November 2011 with $4.1 billion of debt, and which has hoped to exit bankruptcy by the end of the year, last week announced that its restructuring plan for its sewer warrants had, however, become economically infeasible—the plan had called for issuing $1.8 billion of new sewer warrants to redeem $3.2 billion of the outstanding debt.While investors holding the outstanding sewer warrants already had agreed to about $1.3 billion in cuts last May, the refunding proposed for later this year had become unworkable, according to Moody’s, “in part because benchmark municipal interest rates have gone up about 100 basis points since early June.” Now Jefferson County leaders claim that $350 million of additional concessions are necessary to make the recovery plan. Moody’s thus notes that: “An aggregate recovery of less than 50 cents on the dollar would be well below the average recovery of almost 80 cents on the dollar for defaulted municipal bonds since 1970,” noting, unprovidentially, that other municipalities working on chapter 9 recovery plans also suggest recoveries that are potentially lower than historical averages, including Detroit, Stockton, and Harrisburg, writing: “When interest rates increase, as they have since the county’s initial proposal in June, it becomes more difficult to raise a sufficient amount of new funding in the bond market.” Jefferson County officials plan to meet with creditors the next two weeks to resume negotiations over their losses and have warned that if additional concessions are not granted, they will consider imposing them without the support of creditors. A confirmation of the bankruptcy plan of adjustment is currently scheduled for the week after next.
Shared Municipal Services. The Jefferson County Commission yesterday approved an agreement for one dollar with Tuscaloosa County to install a computer software system in the County’s revenue department—the agreement to provide upgraded software for the county’s vehicle tag registration and renewals could mean shorter wait times. For Jefferson County, the new software will play a key role in the overhaul of the county’s revenue department, with Jefferson County Manager Tony Petelos noting: “Their (Tuscaloosa’s) system has been in place for many years and will work in Jefferson County…We have more population here, but that will not be an issue.” Mr. Petelos said Tuscaloosa County developed and owns the program which it is being shared with Jefferson: “We will own the program, so we won’t have to pay fees. We don’t have to lease a program and pay someone to maintain it for us.”Commission President David Carrington said the agreement is “exciting” on a number of levels: “It’s software that we’ll now own and we can modify to fit our needs…We have software that’s being used in multiple counties in the state. And it shows inter-county cooperation.” Commissioner Jimmie Stephens said the software could address the tag lines “once and for all. It’s a system that is up and working properly in Tuscaloosa County….There is no reason to try to reinvent the wheel. Let’s use their system and utilize their technology and their capability.”
Uh oh. The California Public Employees’ Retirement System (Calpers), the largest U.S. public employee pension fund, last week reported it would appeal last August’s U.S. Bankruptcy Judge Meredith Jury’s decision granting Chapter 9 bankruptcy protection to the city of San Bernardino, California. Calpers, which has fiercely opposed San Bernardino’s bankruptcy, since the moment the city suspended its $1.2 million bimonthly payments to Calpers at that time –even though it resumed payments in July 2013, stated it would appeal “on the grounds that the city did not consider alternatives to filing for Chapter 9 protection, did not file its bankruptcy petition in good faith, and has not provided reliable financial information.” At the time of the decision, Judge Jury stated: “I don’t think anyone in this courtroom seriously thought the city was anything but insolvent,” but Calpers attorney Michael Gearing last week said that Judge Jury’s decision set a “dangerous precedent” that will encourage other cities to “create a crisis because they have a large number of creditors.”
Sharing Services to Help Get Out of Municipal Bankruptcy. A controversial move toward potentially outsourcing the city’s fire protection services that previously failed by one vote will be reconsidered today, when the City Council has its first meeting since the resignation of opponent Chas Kelley.If the remaining members of the council vote the same way they did earlier this month, when the item was previously considered, the vote will be 3-3. The City Charter then would grant the tie-breaking vote to Mayor Pat Morris, who devoted much of his Oct. 8 State of the City address to the importance of contracting out for services including fire protection. Further muddying the waters could be the absence of Councilman Robert Jenkins—who has been charged with 30 felony and misdemeanor counts. His continued MIA status would make the vote 3-2 in favor of requesting proposals from the San Bernardino County Fire Department and Cal Fire. Mayor Morris has warned that these proposals would likely take months to prepare, and time is of the essence if — as he believes — accepting one of them would keep the city just as safe while saving millions of dollars a year: “This is a search for information, and that makes ultimate sense…By the time we get information back on the proposals, whether it’s for fire services or park services or custodial services, we’ll probably have a new council at the table. And that’s an opportunity for the new council, whoever they might be, to look straight in the face of this critically important information instead of what we’ve had so far, which is a lot of positioning based on emotion and perceived loyalties.”A new mayor and as many as six new council members will take office in March because of November’s elections and Mr. Kelley’s resignation.The timing — just after Mr. Kelley leaves and just before the election — is suspicious, but more important is the principle of keeping local control, according to Scott Moss, president of the San Bernardino City Professional Firefighters.“Even if it’s a savings now, which I don’t think it will be, what’s been shown is that when you lose control you end up losing service later on…If they think they want to close a fire station, there’s nothing we can do to stop it.”