11.5.13

Today is election day, with a key focus on Detroit and San Bernardino, where voters will select new leaders for what they hope will be post-municipal bankruptcy recovery—even as Detroit completed its time on the witness stand in its historic municipal bankruptcy trial and the statewide public pension fund CalPERS has filed an amicus brief in the San Bernardino case that not only threatens to undermine the city’s ability to exit municipal bankruptcy, but also raises fundamental federalism issues—and as bankrupt Jefferson County adopts an ambitious road show in hopes of selling its plan to exit municipal bankruptcy before the new year.

Motor City Bankruptcy Eligibility.  Early bankruptcy discussions. Mr. Orr spent much of his fourth day on the witness stand in the city’s bankruptcy eligibility trial continuing to deny that a Chapter 9 filing was a forgone conclusion before he took over City Hall in March. Attorneys at Jones Day were discussing the logistics of a Detroit bankruptcy case as early as Jan. 28 in emails the Emergency Manager, according to evidence that emerged Monday during the sixth day of the trial. Testimony and evidence in the trial has shown Mr. Orr began speaking with Gov. Rick Snyder’s recruiter Jan. 30 about the emergency manager job after he and fellow Jones Day associates made a pitch to state officials the day before to become the city’s financial restructuring counsel. Labor union and retiree attorneys are trying to convince U.S. Judge Steven Rhodes the behind-the-scenes discussions Orr and the city’s law firm had about pursuing a Chapter 9 case in Detroit is evidence the city did not negotiate with creditors in good faith — a bankruptcy eligibility requirement. Lynn Brimer, the attorney for the Detroit Retired Police Members Association, showed another email from Jan. 28 between Mr. Orr and other Jones Day attorneys that referred to Detroit as “this bankruptcy” — nearly six months before the city filed for bankruptcy on July 18th. “Based on this email, it’s a foregone conclusion that Detroit will be filing bankruptcy, isn’t it?” Brimer asked Orr. “No,” Mr. Orr testified.

Good Faith Negotiations?  Union attorneys yesterday called witnesses to testify that Detroit is not eligible for chapter 9, because representatives of a union and retirees said a negotiated settlement of the city’s debts had been possible before it filed for bankruptcy in mid-July. The presidents of the Detroit Retired City Employees Association and the Detroit Retired Police and Fire Fighters Association each testified yesterday, asserting their organizations could have negotiated on behalf of city retirees; however, under questioning from city attorneys, the leaders acknowledged limitations to their negotiation authority. DRCEA President Shirley Lightsey and DRPFFA President Donald Taylor each said they were not authorized to negotiate a binding reduction in health or pension benefits; President Lightsey stated: “I’ve never had the authority to make a binding (agreement), and I’ve never asked that from the membership.” Mr. Taylor testified he did not ask for the authority to negotiate cuts to pensions because Mr. Orr and then Michigan Treasurer Andy Dillon told him last spring that pensions were protected under Michigan’s constitution. Steven Kreisberg, AFSCME’s international director of collective bargaining and healthcare policy, testified that concessions agreed to last year by the city and a coalition of unions, though never implemented, showed that Detroit could have negotiated with the unions to avoid bankruptcy. (Mr. Kreisberg is scheduled for questioning this morning by Detroit’s attorneys.)

Pensions. During the morning session, emergency manager Orr testified that he did not mean to mislead city retirees when he said during a June 10 public meeting that pension rights were “sacrosanct” under Michigan’s constitution: I wasn’t attempting to mislead anyone. I was trying to say we understood these issues around pensions.”  U.S. Bankruptcy Judge Steven Rhodes followed up: “What would you say to that retiree now about his rights?” To which, Mr. Orr replied: “I would say that his rights are in bankruptcy now…I’d say those rights are subject to the supremacy clause of the U.S. Constitution.” To which, Judge Rhodes noted; “That’s a bit different than sacrosanct, isn’t it?”  The mini discussion came as Mr. Orr completed four days of testimony yesterday, where the issue of the federalism conflict between the Michigan constitution and chapter 9 has been central. But, when another objecting attorney tried to ask Mr. Orr about the supremacy clause, Judge Rhodes interrupted, saying, “We’ve had enough testimony on the supremacy clause. It’s not really within the scope of this trial.” During this portion of the hearings yesterday, an AFSCME representative noted that the Detroit City Council did not implement concessions last year agreed to by several unions after discussions with state Treasurer Andy Dillon and a key aide to Gov. Rick Snyder: the concessions in February 2012 would have, according to the witnesses, saved Detroit more than $100 million a year and could have helped the city restructure outside of bankruptcy court, according to representatives from the city’s biggest union, AFSCME. But when asked why they were never implemented, Steven Kreisberg, the union’s director of collective bargaining, testified: “The City Council never voted based on instructions it received from state officials.” That led Judge Rhodes to interrupt, asking Mr. Kreisberg to identify the state officials.” He responded: “Treasurer Dillon and, perhaps, Mr. Baird,” referring to the governor’s aide Richard Baird. Donald Taylor, president of the Retired Detroit Police and Fire Fighters Association, testified he was not authorized to negotiate concessions with Emergency Manager Kevyn Orr that could have helped keep the city out of bankruptcy court, claiming that he thought any authorization was premature, because the city had not proposed specific pension cuts. Asked: “Did you ever, prior to the (July 18) bankruptcy, seek authorization from your membership to reduce benefits?” Mr. Taylor responded: “No, I don’t see that as part of the negotiation process….Mr. Orr never indicated to me that he intended to reduce our benefits. I wasn’t going to suggest he reduce our benefits.” Under cross examination, Detroit Retired City Employees Association President Shirley Lightsey, admitted her group, in its approximately 50-year history, had never agreed to cuts that would reduce pensions or health care cuts. Ms. Lightsey was the first witness to testify Monday on behalf of creditors opposing Detroit’s eligibility for Chapter 9 bankruptcy protection. She testified her group never had enough information from the city in order to make a counter proposal that could have avoided a bankruptcy filing.

The city’s legal team rested its case after almost six days of testimony. Objectors, including pension funds, retirees and unions, will formally launch their cases today why Detroit should be denied Chapter 9 bankruptcy relief. Several witnesses will be called, including outgoing state Treasurer Andy Dillon and Richard Baird, a key aide to Gov. Rick Snyder, as objectors argue the bankruptcy filing was unconstitutional and would violate the state constitution, which protects vested pension benefits. Closing arguments in the case are expected to begin Thursday, and Rhodes is not expected to make a decision on eligibility until later this month at the earliest. Michigan Governor Rick Snyder testified last week, a rare instance of a sitting governor testifying in a court proceeding. The city’s bankruptcy team and lawyers for retirees, unions and pension funds could start closing arguments in the Detroit bankruptcy trial Thursday afternoon. The closing arguments likely would stretch into Friday in a trial that will determine whether Detroit is eligible for Chapter 9 bankruptcy relief.

Pensionary Tribulations. Emergency Manager Kevyn Orr insisted yesterday he did not mislead the public in mid-June when he told a retiree that vested public pensions in Michigan are “sacrosanct…they can’t be touched” — four days before he proposed slashing pension checks. (An attorney for the city’s pension funds showed video of Mr. Orr’s June 10 public comments in court last week, suggesting he misled a retiree just days before he rolled out a plan to creditors on June 14 that called for paying pensioners as little as 20 cents on the dollar for a $3.5 billion unfunded liability.) Responding to a question from city attorney Greg Shumaker, Mr. Orr testified: “Despite the implications, I wasn’t attempting to mislead anyone.” That response led to an interruption by U.S. Bankruptcy Judge Steven Rhodes: “Excuse me one second…What would you say to that retiree now?”

Mr. Orr responded: “I would say his rights are in bankruptcy now…I would say his rights are subject to the supremacy clause of the U.S. Constitution.”

“That’s a bit different than sacrosanct, isn’t it?” Judge Rhodes replied.

Orr testified he made it clear at the Detroit public meeting that all of the city’s creditors may have to share in the pain of paring down an estimated $18.5 billion in debts and long-term liabilities.

During a later redirect by a public safety union attorney, Rhodes cut off any additional inquiry about Orr’s views that federal bankruptcy law trumps Michigan’s constitutional protection of contractual pension benefits.

“I think we’ve had enough testimony about the supremacy clause,” Rhodes said. “And it’s not really within the scope of this trial.”

What’s Next? As Detroit’s bankruptcy eligibility trial resumes today for a sixth day of testimony, the city and its creditors are beginning to plan, on the likelihood that the Chapter 9 reorganization case will be approved, and that the arduous process of putting together a recovery plan will soon be underway. Nevertheless, the nine-member Official Committee of Retirees representing Detroit’s more than 23,000 retirees wants Judge Rhodes to approve its request to hire a New York financial firm for $175,000 a month — a cost that will be borne by Detroit’s taxpayers. The committee wants to hire global financial adviser Lazard Freres & Co. to analyze city operations, debt capacity, asset values, and alternatives to Emergency Manager Kevyn Orr’s restructuring plans. The city is paying the bills of the retiree committee’s attorneys and professional advisers after it was created at Orr’s request to give him a negotiating partner in the bankruptcy. Detroit has proposed that Judge Rhodes set a Jan. 21deadline for creditors to file proofs of claim of how much money Michigan’s largest city owes them. Attorneys involved in the case say that will not prevent the city from meeting its publicly stated deadline of proposing a debt-cutting plan by year’s end. But Detroit’s proposed process for filing claims is already generating opposition from unions, the city’s pension funds and retiree associations. Detroit has requested that Judge Rhodes not allow individual retirees to make claims for health insurance and pensions and to limit the city’s general and police and fire retirement systems to making claims about how much the pension funds are owed. It would be “not practicable or meaningful” to have retirees try to estimate how much they’re owed for health care “on a creditor-by-creditor basis,” city attorney Heather Lennox said in a court filing. But, in objections filed during the trial, the United Auto Workers union and the pension funds expressed concern that Detroit’s claims process could prohibit individual retirees from voting on the city’s debt-cutting “plan of adjustment” if they don’t file an individual claim. UAW attorney Babette Ceccotti said the city’s proposed claims process is “too cumbersome” for average employees and retirees to understand and the labor union objects to limiting the retirement systems to making pension funding claims — one of the most disputed aspects of Detroit’s bankruptcy case: “These procedures are unnecessarily complicated, particularly for employees and retirees and could easily become traps for the unwary.”  The UAW represents city librarians, paralegals, attorneys, skilled trade workers, civilian police investigators, and waste water treatment plant operators. Two retiree associations representing former employees and police officers and firefighters said it agrees with the city that individual retirees should not be expected to file claims and worries the process would cause confusion as the city is imposing “draconian changes” to retiree health insurance that take effect Jan. 1. “The Retiree Association Parties fear that in this context the old adage will come to pass that ‘the fastest way to get someone to do something is to tell them not to do that very thing,’” attorney Brian O’Keefe wrote in an Oct. 29 filing. “Retirees are distrustful of the city as it continues its very public plan to impair retiree pension and healthcare benefits.” The city’s pension funds want to see Orr’s debt-cutting plan of adjustment and contend establishing a claims process is “premature and impracticable” at this stage in the bankruptcy, attorney Robert Gordon said in an Oct. 24 court filing.

Motown Partnership. Gov. Rick Snyder and Mayor Dave Bing unveiled Monday a public safety initiative to reduce crime in Motown’s neighborhoods — a key issue striking a nerve among residents—when the two leaders announced the AmeriCorps Urban Safety Corps program, which utilizes 36 Urban Safety Corps members to mobilize and recruit community volunteers to join them in increasing public safety in targeted city neighborhoods. As part of the program, AmeriCorps Urban Safety Corps and key partners, including the city’s police, will evaluate crime hotspots and implement tactics to reduce blight, assaults, break-ins, drug dealing and vehicle crimes. Other tactics will include: crime mapping and analysis, improving neighborhood guardianship, reducing victim attractiveness and susceptibility. Targeted neighborhoods will include: Bates, Bagley and Bethune, the area around Osborn High, Morningside, the East English village area, southwest Detroit and the area around Cody High. Additional targeted areas are: around Clark Elementary, Gompers Elementary, Harms Elementary, Neinas Elementary. The Urban Safety Corps is operated by Wayne State University and has been active in parts of Detroit for three years in the Midtown and East Jefferson communities. The Corps uses a crime-mapping system and relies on collaboration between residents, neighborhood nonprofits, faith-based organizations, law enforcement, existing neighborhood associations and block clubs to improve public safety. Detroit Police Chief James Craig said the AmeriCorps effort will help Detroit reach its goal to make it one of the 10 safest cities in America, adding Detroit has seen a 14 percent drop in homicides in 2013 as crime mapping and analysis of hotspots are paying off.

The 10th Amendment California-Style. In an action that could further exacerbate the ability of San Bernardino to put together a recovery plan to emerge from federal bankruptcy—and which raises inherent federalism issues, the California Public Employees’ Retirement System (CalPERS) has filed an amicus brief in support of the State of California’s suit against San Bernardino for $15 million, which the Golden State claims the city withheld, in a case involving the successor to San Bernardino’s former redevelopment agency. CalPERS filed the amicus brief in support of two other state agencies – the Department of Finance and the Office of the State Controller – in their ongoing dispute with the San Bernardino over tax revenues relating to the dissolution of the city’s redevelopment agency and the operations of the successor agency. San Bernardino City Attorney James Penman argued, in opposing the filing, that the city could not afford the $15 million and would be forced to shut down. The issue is whether chapter 9, the federal law, which prevents creditors from seizing assets or from suing entities under that protection, applies here—especially after San Bernardino lost the first round when U.S. Bankruptcy Judge Meredith Jury in September held that the city and the successor agency to its redevelopment agency are separate entities, making it a non-bankruptcy court issue. In her ruling, 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. Judge Jury, however, left the door open for the city to file before her a second time, which the city has—Judge Jury She has yet to rule on the second filing. Just to further complicate the federalism issues, the California Department of Finance filed an appeal Oct. 1 with the U.S. Ninth District Court of Appeals, claiming that Judge Jury does not have jurisdiction on the redevelopment issues. In its amicus brief, CalPERS writes that the 11th Amendment to the U.S. Constitution protects state agencies from being “hauled into federal court against their will” by a municipality, which is a creation of the state. The brief also describes CalPERS as a state agency in an attempt to point out similarities between the pension fund and the state agencies. CalPERS has been attempting to get relief from the automatic stay protecting entities in bankruptcy from being sued in state court, in order to file suit in district court against the city for the $17 million in missed fees, payments and interest currently owed by the city.  CalPERS brief argues in support of the DOF’s appeal to district court on the grounds that bankruptcy is not an exception to state sovereignty: “By characterizing [the city’s] proceeding as merely one to prevent an action to collect on a debt, the bankruptcy court gave short shrift to the serious federalism concerns that this proceeding raises.” The judge cited as precedent the case of Silver Sage Partners, Ltd. v. City of Desert Hot Springs, Calif. where the appeals court ruled that, “We are not convinced that Congress’s whole municipal bankruptcy statutory scheme is so skewed in favor of the municipality that the commencement of proceedings itself causes irreparable injury.”

Taking Stock in Stockton. A key issue in Stockton’s ability to successfully emerge from municipal bankruptcy will be today’s election outcome with regard to the success or failure of Stockton’s proposed 3/4-cent sales tax hike—projected to raise $280 million in new revenues over the next decade. City leaders, in a unanimous vote, put Measures A and B on the ballot. If passed, it will boost the sales tax rate to 9% and raise an estimated $28 million annually. City leaders promise that two-thirds of it will go to hire 120 more police. The remaining one-third, they say, will go toward paving Stockton’s way out of bankruptcy. If it fails, city leaders say they will have to start over from scratch, devising Stockton’s bankruptcy exit strategy in addition to closing libraries, parks, and another round of cuts to the fire department. Opponents, however, claim the city simply cannot be trusted, warning the city has failed to spend money wisely in the past. Further, they claim there is nothing binding future city leaders to spend the money on public safety. Supporting the tax increase are the Stockton City Employees’ Association, Stockton Professional firefighters Local 456, the Greater Stockton Chamber of Commerce and Business Council of San Joaquin. Leading opponents include former state Assemblyman Dean Andal, David Renison of the San Joaquin County Taxpayers Association, and former City Councilman Dale Fritchen. They contend that a utility tax hike under then-Mayor Joan Darrah was supposed to hire more police. Measure W more recently was sold to voters the same way, Mr. Andal has said, noting neither promise was fulfilled. Ralph Lee White and his Stockton Black Leadership Council last week told The Record’s editorial board last week that he is prepared to sue the city if Measure A passes, stating that black officers have been under-represented for years in the Stockton police department, depriving them of lucrative jobs, which Mr. White, a former councilman, said amounts to taxation without representation.

Selling the Sewers. Before interest rates climb and threaten the feasibility of the amended chapter 9 recovery plan, Jefferson County leaders have crafted an ambitious bankruptcy exit strategy, after the current plan became unworkable because of higher than expected interest rates. Efforts to sell $1.7 billion in refinanced Jefferson County sewer warrants begin this week with presentations by local officials in Birmingham and New York, or, as Commissioner Jimmie Stephens reports: “We will roll up our sleeves and sell potential investors on Jefferson County…Jefferson County is alive and well and beginning to kick again.” The presentations come one week after the County Commission approved modified agreements with sewer creditors which included concessions “valued” at $300 million in plan support agreements needed to exit bankruptcy by the end of this year, relying on the sale of new sewer system warrants to replace sewered debt. The plan is to market and sell the refinanced warrants over the next two weeks and submit the modified plan for approval during confirmation hearings in U.S. bankruptcy court scheduled for Nov. 20. On Tuesday, Commission President David Carrington; County Manager Tony Petelos and Chief Finance Officer George Tablack will attend the Citi 2013 North America Credit Conference where hundreds of firms and municipalities make presentations to approximately 1,500 institutional investors. The county’s presentation is designed to convince potential investors that the current commission is different from past ones and this commission is committed to paying its debts. Commissioner Stephens, who has helped handle negotiations for the county, said investors will hear that the county’s refinanced warrants are a better investment than the county’s current sewer bonds which carry junk ratings, noting the warrants “are debt instruments stripped of fraud and corruption, properly valued in the bankruptcy process and have an established, feasible and confirmable financing plan.” That plan includes operation and maintenance expenses for the next 40 years, debt service for the next 40 years and capital expenditures for the next 10, the Commissioner stated. On Thursday, Stephens and Commissioner Joe Knight will hope to convey that message at investor meetings in Birmingham. The visitors will likely hear from the county, the Birmingham Business Alliance and city leaders. They will also be taken on tours similar to ones held last month when bond rating visited the Civil Rights Institute, Regions Field, and a sewage plant. The investor meetings could be the start of a six city North American “road show” with possible stops in Boston, Philadelphia, Chicago, Milwaukee, San Francisco, and Los Angeles.

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