Yesterday’s elections came during the 7th day of hearings on Detroit’s eligibility for municipal bankruptcy, with key elections in San Bernardino and Detroit, where both incumbent mayors had opted not to run for reelection, but also in Stockton—where voters made an investment in the city’s hoped-for post-bankruptcy future.

Motor City Bankruptcy Eligibility. Yesterday, in Day VII in Judge Rhodes’ courtroom, former Michigan State Treasurer Andy Dillon took the stand, where he spent about two hours testifying and being grilled. He will resume tomorrow. In yesterday’s session, attorneys representing unions, pension funds and retirees questioned Mr. Dillon about emails he sent to Gov. Rick Snyder and his aides last July expressing apprehension that any proposed filing for municipal bankruptcy “look[ed] premeditated” and suggested that Detroit retirees — along with their health care obligations and constitutionally protected pensions — could be handled outside bankruptcy court, writing in one email: “I don’t think we are making a case why we are giving up so soon to reach an out-of-court settlement…Looks premeditated.” This opened the door for questions with regard to whether the city was negotiating with its union and retiree creditors in good faith; nevertheless, Mr. Dillon testified: “I became very skeptical that an out-of-court settlement could be reached,” advising the court that he thought the offer to unsecured creditors was so low it was not practical: “What troubled me the most was the 10-year (restructuring) plan,” Dillon testified. “The recovery for unsecured creditors, I didn’t know how anyone could practicably cut a deal and walk out of the settlement room.” In addition, he testified that bankruptcy was discussed as early as March 2012, although he noted: “It was always the last resort option for us.”

Health Care Benefits. Earlier Tuesday, Detroit bankruptcy attorney Heather Lennox announced that the city would delay health care changes for retirees under age 65 until Feb. 1 because of persistent technical difficulties for users to purchase insurance on healthcare.gov. Despite the change, U.S. Bankruptcy Judge Steven Rhodes denied the city’s motion for a two-week delay of a hearing on a committee of retirees’ request for a preliminary injunction seeking to halt cuts to health insurance for retirees not eligible for Medicare: “There is, I think it’s fair to say, enough confusion created by the roll-out of the Affordable Care Act at this point in time that to add to it or compound it in the way the city proposes here is really not necessary and not fair to the retirees…The resulting confusion, it just isn’t worth it.” Last month, Orr announced sweeping reductions in health insurance for about 28,500 active and retired city employees in an effort to cut $263 million in annual health care costs by $142 million. For retirees under age 65, the city said it would end coverage costing about $605 per month for individuals and $1,834 for families and give them a $125 monthly check to buy taxpayer-subsidized health insurance on healthcare.gov, the Obama administration’s technologically troubled website set up to sell private insurance in 36 states, including Michigan. The Emergency Manager’s health insurance changes calls for offering more than 10,500 retirees over 65 a Medicare Advantage plan with city-funded premiums.

Lawyers for the city’s pension funds Thursday are expected to continue questioning former state Treasurer Andy Dillon about his involvement in the city’s finances and the run-up to the July 18 bankruptcy filing. Richard Baird, an aide to Gov. Rick Snyder, is likely to testify Thursday. Closing arguments in the trial could begin after Mr. Baird’s testimony and stretch into Friday at least.

The Delicate Timing of Filing for Municipal Bankruptcy. During the morning session, emergency manager Orr testified that he did not mean to mislead city retirees when he perhaps, Mr. Baird,” referring to the governor’s aide Richard Baird. Donald Taylor, president of the Retired A UAW lawyer appeared to solve the riddle today of how Detroit and the state Attorney General’s office were tipped off on July 18 that the city’s pension funds were about to try and block a bankruptcy filing. UAW General Counsel Michael Nicholson described a frantic drive to Lansing on July 18, rushed phone calls and a legal brief written in the back seat of a car and described legal maneuvers that ultimately prompted Detroit to file the biggest municipal bankruptcy case in U.S. history July 18 — one day earlier than planned. Nicholson testified that he learned early on July 18 that lawyers for the Detroit pension funds were driving to Lansing to ask a judge for a temporary restraining order that would block Detroit from filing bankruptcy. At the time, Nicholson was in his office at the UAW’s Solidarity House with attorney William Werthheimer, writing a brief relating to a separate lawsuit filed by Detroit retirees and workers against the city. They got a phone call telling them that the pension funds had an emergency hearing in the afternoon of July 18 in an Ingham County court. “Bill and I decided we had to go to Lansing anyway, and that this hearing would probably be important, so we would finish it in the car and had to get there in time for the hearing,” Nicholson said. “Was there any discussion about if the state should be notified about the (temporary restraining order)?” UAW bankruptcy lawyer Peter DeChiara asked. “Yes, we were finishing the brief and I was in the backseat of the car typing away,” Nicholson said. “This was in the car on the way to Lansing?” DeChiara asked. “Yes,” Nicholson said. “Bill asked me, do you think we should notify the state?” DeChiara asked, referring to the pending temporary restraining order request. “I took it as an ethical question — practical ethics,” Nicholson said. “What’s the right thing to do? I said ‘yeah.’ I think we have to. It’s not in our interest, but it’s the right thing to do.” So Wertheimer called the state Attorney General’s Office, Nicholson said. An assistant attorney general thanked them for the heads up. “He said how much he appreciated Bill’s ethical behavior,” Nicholson said. The phone call to the Attorney General’s office was round 3:35 p.m. “How can you put it in such as tight timeframe?” DeChiara asked. Nicholson said he had sent an email around the same time and he later reviewed Wertheimer’s cellphone records. Detroit filed bankruptcy at 4:06 p.m. — 31 minutes after the call to the state Attorney General’s office. The filing was initially dated July 19, but someone wrote in a new date: “July 18.”

Lead-up to Bankruptcy Filing. Much of yesterday’s hearing, taking place on Election Day in the Motor City, revolved around the issue of whether there were good faith negotiations to avoid filing for municipal bankruptcy or not. The city’s pension fund had obtained a copy of a July 9 email the former Michigan Treasurer Andy Dillon had sent to Gov. Rick Snyder in the days leading up to the bankruptcy filing: “Because pensions have a long life there are a lot of creative options we can explore to address how they will be treated in a restructuring,” leading the city’s pension fund attorney, Jennifer Green, to ask: “Did you ever propose these creative options with the pension funds or unions?” “No,” Dillon said, adding that the pension fund shortfall was not the “major driver” of whether Detroit filed bankruptcy to restructure more than $18 billion in debts: “The (shortfall) was relevant, but not a driving factor of whether (Chapter) 9 was necessary,” Dillon testified. Mr. Dillon testified that he became “very skeptical” on June 14th that Detroit could avoid filing for bankruptcy after seeing the city’s restructuring proposal, because the offer to unsecured creditors was so low it was not practical: “What troubled me the most was the 10-year plan…The recovery for unsecured creditors, I didn’t know how anyone could practicably cut a deal and walk out of the settlement room.” The restructuring plan included pension and retiree health care cuts, offered some creditors less than 10 cents on the dollar, and outlined an abrupt decision to stop paying unsecured debt so the city could fund essential services.

Premeditated? During yesterday’s hearings, an email from former Michigan Treasurer Andy Dillon was released, in which Mr. Dillon had expressed apprehension on July 10th that a Detroit bankruptcy filing would look “premeditated” and writing there was another option available to treat retirees outside of federal court. The email, just eight days before Detroit filed the biggest municipal bankruptcy in U.S. history, was in response to Emergency Manager Kevyn Orr’s request for permission to file bankruptcy. Mr. Dillon had replied: “I don’t think we are making a case why we are giving up so soon to reach an out-of-court settlement…Looks premeditated. I think we need to say facts got worse as we dug into the numbers and I believe there is a state court option to get retirees into a class (we don’t acknowledge that) and why is that unpractical. We don’t even say they rejected the city’s proposal. I think we may want a take it or leave it demand before we pull this trigger.  I agree with the recommendation but I don’t think we made the case.” Nevertheless, Mr. Dillon yesterday testified that the health of Detroit’s pension funds was worsening in the days leading up to the city’s historic bankruptcy July 18th. In another email, Mr. Dillon had written to the governor about the status of a possible bankruptcy filing: “We remain, in many ways, at the informational stage,” leading William Wertheimer, a lawyer representing current and retired Detroit employees, to question Mr. Dillon: “That was true, was it not?” “I believe so, yes,” Mr. Dillon responded; “Did anything happen between the 9th and the 18th to take it out of the informational stage?” the attorney followed. “We were getting more information and the numbers kept getting worse for the funding level of the pension funds…As we learned new facts, the health of the pension funds seemed to be getting worse.” Mr. Dillon acknowledged that bankruptcy was discussed as early as March 2012, but not the preferred option for Detroit.  “Even the thought at that time was we did want to get to a consent agreement,” to restructure the city’s finances, he testified; “It was always the last resort option for us.”

Good Faith Negotiations? Detroit Emergency Manager Kevyn Orr and his restructuring team did not negotiate with the UAW over proposed health care cuts, the union’s lawyer, General Counsel Michael Nicholson, testified yesterday, seeking to underscore the lack of good faith negotiations with creditors before the city filed Chapter 9 bankruptcy July 18th, focusing on a July 11 meeting with Emergency Manager Orr’s team, one week before the city filed bankruptcy. “To what extent were their negotiations?” UAW lawyer Peter DeChiara asked Mr. Nicholson.  “There were negotiations that we tried to initiate with the city,” over health care cuts, Mr. Nicholson testified: “We invited them to negotiate through a class-action process. “We asked for that to be taken back to Mr. Orr and Mr. Orr never responded to us or his lawyers, ever.” The testimony, however, led to a contentious exchange with Judge Steven Rhodes: “Given that lack of response, is what occurred negotiations?” Mr. DeChiara followed. “In my view, the first step is to…” Mr. Nicholson said, before being interrupted by Judge Rhodes: “That’s not an answer.” “I have to explain,” Mr. Nicholson said; “No you don’t,” the Judge replied. “The first step…,” Mr. Nicholson said before, again, being interrupted by the judge: “If that’s your answer,” Judge Rhodes said, “we’ll move on.” What emerged from the session was that the UAW was unwilling to negotiate any cuts to vested Detroit retiree pensions, because of its belief that the benefits are protected by the state constitution. UAW General Counsel Michael Nicholson described the union’s stance after Emergency Manager Kevyn Orr signaled June 14th that retiree pensions would be slashed to help restructure the city’s $18 billion in debts. The cuts would impact an estimated $3.5 billion shortfall in the city’s pension funds. “Was the UAW willing to negotiate with the emergency manager over reductions in accrued pension benefits?” UAW bankruptcy lawyer Peter DeChiara asked. “No,” Nicholson said.  “Why not?” the lawyer asked. “The Michigan constitution…we believe is binding on the UAW, all citizens of Michigan, including the governor,” Nicholson responded, “and precludes the impairment or diminishment of benefits. It would be in violation of state law for us to do that: “We also believe that only the citizens of the state of Michigan, through the amendment process, can change that legal fact. And that hasn’t happened. The governor and Orr cannot amend the constitution.” Nicholson also faulted the city for asking creditors to sign non-disclosure agreements before getting access to the city’s financial data: “Good faith negotiations cannot occur without access to information,” Counselor Nicholson yesterday also sought to demonstrate that Emergency Manager Kevyn Orr and his team muzzled creditors during a key June 14th meeting during which the team unveiled plans to restructure the city’s $18 billion in debts, according to testimony, testifying attendees, including bondholders, unions, pension funds and retiree groups, were not allowed to speak freely; instead, they had to submit written questions. Nicholson’s testimony is aimed at convincing U.S. Bankruptcy Judge Steven Rhodes that the city failed to negotiate in good faith with creditors and is not eligible for bankruptcy relief. “Have you ever participated in negotiations in which one side was not allowed to speak freely?” UAW lawyer Peter DeChiara asked. “I have never, never been involved in a negotiation when only one side speaks,” Mr. Nicholson responded. The city’s largest union never made a counter proposal regarding proposed health care changes before Detroit filed bankruptcy July 18, according to testimony. So, Detroit bankruptcy attorney Geoff Stewart followed up, asking AFSCME’s collective bargaining director Steven Kreisberg: “Did your union propose a counter-proposal?” “We never provided one,” he said. “That wasn’t my question,” Stewart said. “Did you prepare one?” “I did not,” Kreisberg said. “Did your union prepare a proposal?” the lawyer asked. “Post-petition we proposed one on health care,” Kreisberg said. AFSCME’s legal team has argued there wasn’t enough time between Emergency Manager Kevyn Orr’s restructuring proposal on June 14 and the bankruptcy filing July 18 to negotiate concessions in good faith.

And the Winner….Mike Duggan overcame questions about his outsider status to become Detroit’s first white mayor in about four decades, beating Wayne County Sheriff Benny Napoleon yesterday in a campaign about who could best revive the Motor City. Mayor-elect Duggan, who was born in Detroit, but has spent much of his career in the western Wayne County suburb of Livonia, it was a victory rooted in his turnaround persona that may also reflect a move away from decades of racial politics. He will take over from one-term Mayor Dave Bing in a city where 83% of the residents are black, and he will become a mayor with mixed responsibilities, as he will have the lesser role alongside of Detroit Emergency Manager Kevyn Orr, who holds the power to make most major decisions. Mr. Duggan will also work with a new city council to address huge problems — high crime, poor services — with limited finances. Mr. Orr noted: “In this time of important change for the City, Detroiters have come together to voice their desire for progress…I look forward to working with Mayor-elect Mike Duggan to build the vibrant and strong future the citizens of Detroit deserve.”  Michigan Gov. Rick Snyder, congratulating the mayor-elect, said:  “I look forward to working with him on making Detroit a safe and attractive place for people to live, work, invest, and do business,” Snyder said. “Mayor-elect Duggan’s financial acumen and experience in turning around the Detroit Medical Center and other entities should serve him well in his new role.”  In his career, the mayor-elect has worked in the Wayne County Prosecutor’s office, as Deputy Wayne County Executive, and at the SMART regional bus agency. In his post-election statement, he said: “The way we are going to rebuild this city is to value every single person in our community…It will no longer matter if you are black, brown or white; it will no longer matter if you are Christian, Jew or Muslim. … We want all of your talents. Only in that way, will we rebuild a Detroit we deserve.”

The Winner is? San Bernardino voters sent a mixed message yesterday, as incumbent Councilwoman Wendy McCammack led all mayoral candidates and will face accountant Carey Davis in a February run-off; yet, the surprising win came even as voters in her 7th Ward voted to recall her. With all precincts reporting in unofficial results as of this morning, Councilmember McCammack led Ms. Davis by 136 votes, with candidates Rick Avila and Rikke Van Johnson trailing by more than a 1,000 votes and others in the 10-person field further behind. Voters recalled City Attorney James F. Penman, which was at the polls to elect new leadership after incumbent Mayor Pat Morris a year ago that he would not seek a third term. The race was further rattled when incumbent Councilmember Kelley, who had been on the City Council for 10 years and was considered a front-runner for mayor, resigned his seat and dropped out of the race after pleading guilty to perjury and admitting he spent campaign money on personal expenses. Councilwoman McCammack, a 13-year veteran of the City Council and owner with her husband of three businesses, has based much of her campaign on the fact that she has experience and was on the council to see “what had gone wrong.” The decisions she opposed, she said, were those that had pushed the city into bankruptcy court, including spending on nonessentials and stances she characterized as “pro-homeless” and “anti-police.” Ms. McCammack was one of three elected officials facing recall on Tuesday. She and Mr. Penman were recalled, while Councilman John Valdivia successfully fought off the attempt by a coalition of local business owners and residents who initially sought the removal of the entire council and mayor, but narrowed their focus to candidates who were not already up for election.

Taking Stock in Stockton. Stockton voters yesterday displayed confidence in the city’s future, voting 52.5%-47.5% against to adopt Measure A, a 3/4-cent sales tax to pay for safety and law enforcement services and to help the city recover from bankruptcy, and by nearly a 60% margin to adopt Measure B. Measure B is a recommendation that the city use 65% of the revenues raised through Measure A to pay for its Marshall Plan on Crime. The remainder of the money would be used to help the city recover from bankruptcy. Measure B is advisory and non-binding. The election results came as Fitch, in a new ratings report, noted that, if approved, Stockton’s Recovery Plan for the Adjustment of Debts (plan of adjustment) identifies negotiation strategies, legal ambiguities, and their potential consequences for future municipal bankruptcies in California and elsewhere: “Stockton’s ability to achieve significant concessions from labor under threat of bankruptcy provides food for thought about incentives in other potential cases…The specter of bankruptcy may have motivated labor, although not bondholders, to negotiate,” wrote Amy Laskey, a Managing Director. In future cases, Fitch noted, labor may feel the risks of losing all negotiating power in a Chapter 9 proceeding are too great—or labor interests might believe that the municipality’s need to continue to provide competitive wages and benefits will adequately protect its interests. The report pointed out that one of the most notable aspects in the city’s plan is the elimination of other post-employment benefits (OPEBs), which was negotiated with current employees and retirees—an outcome which the agency believes meaningfully improves their affordability, noting that despite creditor bondholder objections about ongoing CalPERS payments, Stockton appears to have acted practically since the proposed two-thirds reduction in retiree benefits would have made those jobs uncompetitive. The rating agency suggests that lease revenue bonds are expected to be significantly impaired. The plan of adjustment adheres to the Bankruptcy Code’s treatment of “special revenues,” as debt secured by such revenue streams, including utility revenues and tax increment, will continue to be paid to the extent the pledged revenues are sufficient. In addition to employees, retirees, and bondholders, taxpayers are being asked to contribute to the city’s recovery by approving a three-quarter cent sales tax increase this November. 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.



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