10.23.13

Let the Trial Begin. U.S. Bankruptcy Judge Steven Rhodes this morning opens the most critical stage so far of Detroit’s municipal bankruptcy case―to determine whether the city is eligible. The city’s attorneys hope to finish their arguments by Friday, intending to call at least five witnesses, including Detroit emergency manager Kevyn Orr, the city’s investment banker Ken Buckfire, and police chief James Craig. Judge Rhodes is likely to also hear testimony from Michigan Governor Rick Snyder, after the UAW Monday said it has subpoenaed Governor Snyder, former Michigan Treasurer Andy Dillon, and top aide Richard Baird, to testify about their motivations and decisions leading up to the July chapter 9 filing. More than 15 witnesses may testify all together. Creditors — including unions and retirees, who are objecting to the eligibility — said they hope to finish their arguments by next Tuesday. No bondholders or insurers are challenging the city’s eligibility. Should this phase of the trial not finish by then, Judge Rhodes has set aside November 4-8 as additional dates if necessary. For Judge Rhodes, the key determinants will hinge on Detroit’s proof that the city is insolvent, that it either negotiated in good faith with its creditors or that negotiations were impracticable, that it was authorized by the state to file, and that it intends to file a plan of debt adjustment. The Motown has $18.5 billion of debt it wants to restructure as part of the bankruptcy process, including $11.5 billion of which it is treating as unsecured.

Health Benefits in the Motor City. Just one week after Detroit emergency Manager Kevyn Orr announced sweeping changes to health insurance for active and retired workers slated to take effect on Jan. 1st, the Detroit Retired City Employees Association, the Retired Detroit Police and Fire Fighters Association, and the American Federation of State, County & Municipal Employees Chapter 98 have sued Detroit Emergency Manager Kevyn Orr and the city over steep cuts to health insurance plans in an effort to block Emergency Manager Orr from implementing the cuts and to reinstate current benefits, claiming: “The impact of the city’s decision on the retirees will be devastating. To obtain comparable healthcare benefits, many of them will be forced to go out of pocket an additional several hundred dollars per month and several thousand dollars per year…The city’s decision to walk away from its retirees, all of whom devoted large portions of their gainful years working on its behalf, is unconscionable.” The health care changes mark the first major dent Mr. Orr is attempting to put in the city’s legacy costs at the heart of the city’s municipal bankruptcy case as he seeks to shift more of the cost burden onto employees and retirees. Detroit officials began sending notices two weeks ago to about 8,000 retirees younger than age 65 that Detroit is axing their city-paid $605 per month retiree health insurance coverage ($1,834 for families) and instead giving them a monthly $125 payment to use toward a private plan on the federal health insurance marketplace exchanges. Under the proposed changes, disabled retirees younger than age 65 will get a $200 monthly payment for their health insurance needs. More than 10,500 retirees older than 65 will be offered a Medicare Advantage plan with city-funded premiums, but will be responsible for paying their deductibles and secondary insurance coverage, according to the plan. Detroit’s 10,000 active city workers will see their individual deductibles nearly quadruple from $200 annually to $750, while employees with families on the city’s insurance will see their maximum annual out-of-pocket costs rise 50% from $3,000 to $4,500.

Banking on Alternatives. Even as the historic trial commences this morning, the Detroit City Council will hold an early-morning session to consider an alternative proposal to Kevyn Orr’s plan to secure a $350 million debtor-in-possession loan with Barclays. The city council Monday rejected the measure. Under state law, the council is required to propose an alternative plan that raises a similar amount of money. The council has scheduled a session for early today, before the time Judge Rhodes has scheduled for the commencement of today’s hearing.

Where Does the Buck Stop? The San Bernardino Sun ran a guest editorial yesterday from a retired San Bernardino Superior Court Judge with regard to the upcoming recall election of City Attorney Jim Penman:

By John P. Wade

POSTED: 10/22/13, 10:35 AM PDT |

As a retired Superior Court judge, I join others who have expressed concerns to you, the residents of San Bernardino, about what is at stake on Nov. 5 for the city’s legal affairs.

San Bernardino City Attorney Jim Penman is currently the focus of a recall election. We oppose this expensive recall because it is based on the false premise that Mr. Penman is somehow responsible for the city’s bankruptcy.

The city attorney provides legal advice to city policymakers. He is not responsible for San Bernardino’s bankruptcy. In fact, he repeatedly warned city officials about San Bernardino’s dire financial situation. However, the city attorney has no vote at City Hall; nor can he veto ill-advised spending decisions made by the mayor and Common Council.

I am especially concerned at the negative impact the recall will have on San Bernardino’s financial position at this critical moment in its bankruptcy case. The prospect of San Bernardino losing its experienced and effective city attorney poses a serious risk to the city’s legal position that could cost city taxpayers millions of dollars.

When it became evident that the city would have to file for bankruptcy, City Attorney Jim Penman dutifully and competently stepped up to the plate and took charge of the bankruptcy action which had to be filed and decided in federal bankruptcy court.

Penman is one of a handful of city attorneys, indeed he is one of only a handful of California lawyers, who has studied and understands municipal bankruptcy law, which is a highly specialized field of the law.

Penman, aware that the city of Vallejo paid more than $13 million in attorney fees on its bankruptcy, retained the state’s leading bankruptcy attorney, but took prudent steps to limit taxpayer costs for that legal work.

The city attorney’s fiscal prudence has saved city taxpayers $270 per hour in outside legal fees. Whereas Vallejo paid $680 per hour for its private bankruptcy attorneys, San Bernardino is paying only $380 per hour.

But Penman did not stop there. He insisted that all routine legal work be performed by deputy city attorneys who are paid an average of $76.31 per hour — a further savings to the taxpayer of $300 per hour.

City Attorney Penman’s legal experience and sound financial management have already saved San Bernardino taxpayers millions of dollars.

The city’s legal bankruptcy team, headed by Penman, recently succeeded in defeating the efforts of the employee pension giant, CalPERS, to block San Bernardino’s acceptance into the bankruptcy court. Had the city been defeated by CalPERS the city might have dissolved. This was no small accomplishment.

Neither of the two lawyers running to replace Mr. Penman has the knowledge or experience in municipal bankruptcy law that the city needs.

Recalling Penman, the city’s strongest legal asset, and bringing in an inexperienced attorney who would have to engage in on-the-job training, would be a mistake that could cost the city millions of dollars that are needed to police San Bernardino and provide other vital city services.

Mr. Penman is a strong personality. You may or may not agree with Penman on certain issues — you may not even like him — but San Bernardino needs his legal expertise to lead the city’s legal team successfully through the bankruptcy case.

At his critical stage in the bankruptcy process, what matters most are experience and professional competence. It is not the time to gamble with San Bernardino’s financial future by electing an inexperienced replacement city attorney.

Please vote no on the recall of City Attorney Jim Penman.

John P. Wade is a retired San Bernardino Superior Court judge.

 

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