The Big Kahuna.  U.S. Bankruptcy Judge Meredith Jury this week rejected a request by California’s public pension agency CalPERS to appeal her August decision to grant San Bernardino municipal bankruptcy protection directly to the U.S. Circuit Court of Appeals, but she invited CalPERS to appeal her decision declaring San Bernardino eligible for federal bankruptcy to the U.S. District Court. “I fully understand the importance of this case goes far beyond the city of San Bernardino…It would be useful for the state, and the whole country, if the issue of eligibility goes to an appellate court.” Judge Jury averred she and other bankruptcy judges were “floundering around” when it came to their eligibility rulings, and she said some clarification of the municipal bankruptcy law – for which there is little precedent – would be welcome: “It would be useful for the state, and the whole country, if the issue of eligibility goes to an appellate court.” The incipient, renewed between the bankrupt city of San Bernardino and CalPERS centers around the city’s $17 million in pension arrears, an important milestone in the case—an issue not dissimilar to the intense courtroom arguments that have transpired all week in Detroit before U.S. Bankruptcy Judge Steven Rhodes. Judge Jury believes the San Bernardino case could set a national precedent. Subsequent to this week’s hearing before Judge Jury, CalPERS, the nation’s largest public pension fund with assets of $277 billion, warned that San Bernardino cannot be allowed to get away with failing to pay the pension fund for an entire year. (San Bernardino stopped paying CalPERS its $1.2 million bimonthly employer’s contribution for 12 months after it declared bankruptcy in August 2012. CalPERS claims the bankrupt city owes $17 million, plus growing interest, late fees and penalty payments. Mike Lubic, an attorney for CalPERS, in a statement to Reuters, said: “CalPERS can’t have cities financing their bankruptcy cases by just stopping making payments…You can’t make not paying CalPERS cheap and easy, because then it creates this tremendous incentive for other cities to file for bankruptcy and stop meeting their obligations.”

The increased heat in San Bernardino come at a critical juncture: San Bernardino is entering a critical phase in its municipal bankruptcy―three days of closed-door negotiations with creditors next month―, and local elections next week in which two council members and the city attorney face recalls. Earlier this month, San Bernardino officials provided Judge Jury with a short “term sheet” spelling out a draft proposal of how it intends to deal with its creditors―three days of mediation on the term sheet are scheduled for next month on the term sheet, which Judge Jury has ordered to be kept secret. Unlike Detroit, which has its own pension funds, CalPERS administers benefits for over 3,000 city, state, and local agencies―some nearly 3 million people. But like the Motor City, San Bernardino has elections next week, further complicating the issue: the new city council will have to endorse any final bankruptcy plan. Unlike Detroit, next week’s election will involve not just for whom to vote, but also whom to recall: two weeks ago, two council members were criminally indicted in separate cases. One has since quit, although his name remains on the ballot for mayor next week; in addition, along with recall petitions against the city attorney and two other council members, three others are in re-election battles and 11 candidates are vying to replace the outgoing mayor.

Jefferson County Clears a Hurdle. Jefferson County commissioners late yesterday announced agreement major creditors that will now allow its modified municipal bankruptcy recovery plan to be approved so that the county can successfully emerge from Chapter 9, the nation’s second-largest U.S. municipal bankruptcy: “The Jefferson County Commission will consider a modified financing plan that incorporates the agreements in principle we have reached with representatives of all of the major sewer creditor groups: JP Morgan, the bond insurers, the hedge funds and the liquidity banks.” The Commissioners are scheduled to review the plan today, no doubt hoping to find it more of a treat than a trick, after which they will release details. The new agreements are with the major sewer system creditors JP Morgan, bond insurers, hedge funds, and liquidity banks, which had already agreed to take a loss of $1.3 billion on $3.2 billion of outstanding sewer debt. However, in the wake of rising interest rates (Jefferson County now plans to sell refunding bonds in November as part of its bankruptcy exit plan to deal with $3.2 billion of sewer debt.), county officials had said they needed $350 million in additional in concessions since June, when JPMorgan, hedge funds, and other creditors reached a tentative settlement to end the $4.2 billion chapter 9 bankruptcy. The June agreement, which still must be approved by U.S. Bankruptcy Judge Thomas Bennett, proposed significant haircuts to JPMorgan and others, and relied on a planned sale of $1.9 billion of new debt to replace soured sewer-system bonds with a face value of about $3.1 billion. Commissioners Jimmie Stephens and David Carrington yesterday stated: “This effort has involved a lot of people who have worked diligently to solve a very difficult problem…Without question, more work remains to get the county out of bankruptcy by the end of the year, including confirmation of our plan and the successful placement of the new sewer warrants. Judge Bennett has set a confirmation hearing on the bankruptcy exit plan for Nov. 12th. Jefferson County previously had planned to issue $1.9 billion of sewer refunding warrants around Dec. 20th as part of the overall plan to exit bankruptcy at that time.

Detroit is Thirsty. Even as the fierce stakes in the pension battle raged in San Bernardino, Motor City Emergency Manager Kevyn Orr has proposed regionalizing the Detroit Water and Sewer department as a potential means to raise up to $9 billion—badly needed revenues that could help finance the Motor city’s pension promises to current employees and retirees. The offer, which has emerged within the past few weeks during private meetings with city restructuring agents and suburban leaders, marks the first proposal in what could be a prolonged negotiation over Kevyn Orr’s plan to spin off the department, share control, and reduce the cost of running one of the nation’s largest public utilities. Mr. Orr is seeking $9 billion, financed over 40 years, which would provide a steady, unrestricted revenue stream for Detroit. Mayhap unsurprisingly, suburban leaders have not reacted with excitement, according to Mr. Orr’s office, which described the proposal as akin to an opening offer; however, the $9 billion figure is a starting amount (also startling) intended to try to jumpstart confidential negotiations headed by the city’s investment banker Kenneth Buckfire. The change, if agreed to, would impact more than 4 million customers across the Detroit metropolitan region. The negotiations involve leaders from Wayne, Oakland, and Macomb counties. The department, which carries about $6 billion in debt, is currently overseen by a seven-member board―including four Detroit residents and three from Wayne, Oakland, and Macomb. Last June, Emergency Manager Orr had proposed stripping the name “Detroit” from the city’s water department, transferring assets to a regional group, and refinancing the utility’s debt. At the time, he estimated such could generate almost $1 billion in savings. Now, with the city in the middle of the critical phase of the U.S. Bankruptcy court determination over its eligibility to file for federal bankruptcy—and, if permitted—to put together its plan of adjustment, there is increased pressure to try and reach agreement before the end of the year.  Any such plan is expected to propose spinning off, selling, or keeping the Water Department. Under the draft proposal, the provisionally named Metropolitan Area Water and Sewer Authority would either own or lease the department, collect revenue from water bills, and make payments to Detroit—with annual payments initially under $100 million and steadily ascending to more than $200 million, according to reports from the Detroit News. The issue over spilt water has a long history in the region: U.S. District Judge Sean Cox ended his oversight of the Motor City’s Water Department last March after many years’ of battles over control among city, regional, and state leaders. Judge Cox rejected the city’s proposal to transfer one of the city’s largest assets to a regional authority in exchange for as much as $70 million in annual payments to the city, noting that the amount “appears to be sheer speculation, based upon the hope that the DWSD’s bond ratings would improve substantially upon the creation of the proposed authorities.” Mr. Orr’s spokesperson said any revenues gained from the proposed regionalization sale could be spent on pensions, where Mr. Orr has guesstimated in the city’s bankruptcy filing there is an estimated $3.5 billion shortfall in the city’s retirement system.

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