11.11.13

Motor City: Liquidation Sale. U.S. Bankruptcy Judge Steven Rhodes set a deadline of tomorrow for the Motor City to come up with a liquidation plan to address the hundreds of civil suits pending against the city—more than 500 of which were automatically stayed when the city filed for chapter 9 on July 18th―ranging from multimillion dollar wrongful death suits, such as one pending from the murder of a Detroit police officer. That is, Mr. Orr and his team must try to determine how much this multitude of suits could cost the bankrupt city, in order to guesstimate how those settlements and judgments would be handled in the final bankruptcy plan. In a municipal bankruptcy, the federal bankruptcy court normally has to sort out the civil suits and determine whether or not to lift the stay and let the suit run its course in state or district court. If there is the potential for some kind of liability against the municipality, the judge can rule or hear the case. However, even if those bringing liability suits against the city obtain settlements, or even judgments, that merely gets them entry into the debtor pool, whence they would be, like any other creditor, subject to haircuts and whatever settlement is part of the final recovery plan. For instance, in Vallejo, creditors — including civil claimants — settled for 23 cents on the dollar. In Stockton, the recovery plan provides for one cent on the dollar. Chapter 9 provides, however, an exception for wrongful death and personal injury cases. In those instances, the federal law bars a bankruptcy judge from hearing the case. In the Jefferson County case, Judge Thomas Bennett reviewed the approximately dozen civil suits pending against the county individually, according to Mr. Patrick Darby, a bankruptcy attorney who represents Jefferson County. As of the end of last month, Jefferson County had reached a tentative agreement with creditors to settle and emerge from bankruptcy. Judge Rhodes, in his order last month, recommended Detroit form a committee to negotiate with the city–similar to the earlier recommendation he had made for the creation of a committee to represent the city’s 23,000 retirees who were not represented by any of the city’s unions. If Mr. Orr does not submit a plan acceptable to Judge Rhodes, the judge could allow the stay automatically triggered last July to expire, so that all the suits against the city would proceed.

San Bernardino Set to Take on Pensions.  Although the outcome of the mayoral election in San Bernardino will not be resolved until next January’s runoff, the new majority in the city’s council—scheduled to be sworn in next week—has made clear it believes it has a mandate to challenge the California Public Employee Retirement System (CalPERS) as critical to any final recovery plan to allow the city to exit bankruptcy. The issue will likely come to a head later this month, when three days of closed door discussions are scheduled to commence on the 25th, including with CalPERS—its biggest creditor, later this month—with the massive agency asserting that the California constitution bars any cuts in the city’s contributions. The emerging commitment to seek a haircut from Cal PERS contrasts with its neighboring chapter 9 city Stockton, to the north, which is hoping to emerge from municipal bankruptcy by early next year without cutting payments to CalPERS. In addition to the changes in the council, voters elected a new city attorney, Gary Saenz, who told Reuters: “CalPERS has to accept the fact of San Bernardino’s situation and look at compromise.” Similarly, newly elected councilmember Jim Mulvihill told the news agency that the city’s pension promises “are obligations we may not be able to make…We’ve known for a long time that pensions were going to be a problem. We are going to have to sit down with CalPERS.” Newly elected Scott Beard followed: “At some point, a federal judge is going to have to tell CalPERS to take 80 cents on the dollar.”

Harrisburg Sets New Direction. Just as in San Bernardino, fiscally distressed Harrisburg voters last week elected Eric Papenfuse—who had defeated incumbent Mayor Linda Thompson last May in a primary. The changeover at City Hall comes at an equally critical juncture: city leaders are hoping for final agreement and adoption of a financial recovery plan that has been under negotiation since an unprecedented state takeover of the city government two years ago by December—putting the city on a schedule similar to both Stockton, California and Jefferson County, Alabama. A state-appointed receiver is assembling a recovery plan that would provide for the sale of Harrisburg’s municipal trash incinerator to the Lancaster Solid Waste Management Authority for between $126 million and $132 million. The Harrisburg recovery plan also calls for $283 million in borrowing by the Pennsylvania Economic Development Financing Authority, mainly to finance outstanding municipal debts, including $100 million in Harrisburg Parking Authority debt. The plan would provide for the state agency to be repaid by receipts from the city’s parking lots, garages, and meters. Harrisburg’s creditors have agreed to as much as $100 million in haircuts or concessions—concessions that City Council members opposed to the takeover had long demanded as part of any debt deal. Finally, as in Stockton, city taxpayers will play a key role: Harrisburg doubled its earned-income tax rate through 2016. The recovery plan calls for the elimination of the incinerator debt and ensures a balanced city budget for at least the next three years, according to Cory Angell, spokesman for the receiver’s office.

 

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