Motor City: Liquidation Sale. In response to yesterday’s deadline set up by U.S. Bankruptcy Judge Steven Rhodes for the Motor City to present 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. Mr. Orr and his team, in an 82-page report proposed arbitration.   The City of Detroit has come up with a way to resolve all its messy lawsuits: arbitration―the city proposed to use mandatory alternative dispute resolution (ADR) procedures, including case evaluation and arbitration services, which are designed to resolve cases without full-blown litigation. Under the proposal, Detroit would coordinate its process through the Wayne County Mediation Tribunal Association, a nonprofit group created by a state court in 1979 to provide a pool of mediators to help resolve lawsuits out of court. Under the ADR process, settlement discussions would occur, along with an exchange of information between the parties. Were a settlement not to be reached at such a first stage, the case would get evaluated. Within two weeks of a case evaluation hearing, a panel would issue a value on the claim, after which, each party would have 28 days to accept or reject the offer. If case evaluation alone fails to resolve the lawsuit, binding arbitration proceedings would ensue―with the exception of workers compensation claims, on which cases the city proposed such claims would be handled in the usual workers compensation procedures.

Motor City Pensionary Challenge. Ryan Plecha, an attorney for the Detroit Retired City Employees Association, yesterday advised a special meeting of 800 Motor City retirees he would take the retiree pension fight to the Supreme Court to protect the rights of former city employees, stating: “Apparently the governor and the emergency manager are reading a different Constitution than I am…We are prepared to take it to the Supreme Court if we need to.” At the meeting, where there were some 1400 attendees, Shirley Lightsey, president of the retiree association, said: “We’re going to start negotiations with a health care plan…The plan designs they have selected are not adequate for any of us. It’s not acceptable.” (Emergency Manager Kevyn Orr’s proposed health care initiative for retirees has been postponed until Feb. 28 under an agreement with the city and the retiree committee, so that the current health care coverage and other post-employment benefits will continue while the city and the retiree committee appointed in bankruptcy court continue negotiations on a long-term package. Retirees had been scheduled to get money from the city to find insurance on the federal health care marketplace exchanges. Changes to the health care program were set to begin Jan. 1. Officials proposed to drop the city-paid $605-per-month retiree health insurance coverage ($1,834 for families). Instead those under 65 would receive a monthly $125 payment to use toward a private plan on the federal exchanges; disabled retirees younger than 65 were to get a $200 monthly payment for their health insurance needs. More than 10,500 retirees over 65 were offered a Medicare Advantage plan with city-funded premiums, but would be responsible for paying their deductibles and secondary insurance coverage, according to the plan.) Mr. Plecha told the attendees he expected that U.S. Bankruptcy Judge Steven Rhodes to take two to three to decide upon whether the city is eligible for chapter 9 bankruptcy.

Motor City Balancing Act. The delayed delivery of an October 24th memorandum from Emergency Manager Kevyn Orr’s office detailing the shift of $95 million for unsecured bond debt and pension obligations in the current budget to pay for a team of nearly a dozen attorneys and professional firms working to restructure the city’s finances and operations has angered City Councilmembers and reopened questions about Michigan’s emergency law, Public Act 436, and its provisions for public accountability. The two-page notice to the council from Interim Budget Director Brent Hartzell advised that the debt service appropriations for pension obligation certificates and general obligation debt — not currently being paid because of the Chapter 9 bankruptcy protection filing — are to be reallocated for “general operational restructuring purposes…A subsequent amendment will reallocate authority within grant and enterprise funds to the extent necessary. Once decisions are made in placing specific authority within designated agencies, reallocation amendments from the restructuring account will also be required.” Detroit Council President Saunteel Jenkins, noting the lack of transparency by the Emergency Manager’s consultants, said those funds could, instead, be used to enhance information technology and staffing, including police officers: “There are no checks and balances under Public Act 436. That’s the problem. It’s an illusion of democracy,” adding that, to date, consultants working for Detroit have not been transparent. Council members yesterday expressed frustration with the move, saying the funds could have been reallocated to improving city services, rather than to consultants who have not provided the council with any progress reports: “All of these departments are struggling and short-handed. If we are not paying creditors, it (the funds) could go back to the system.”

CalPERS Takes on San Bernardino and U.S. Bankruptcy Court. The California Public Employees’ Retirement System is continuing to press U.S. Bankruptcy Judge Meredith Jury to reconsider her decision denying without prejudice CalPERS’ request that Judge Jury certify a direct appeal to the U.S. Ninth Circuit Court of Appeals of San Bernardino’s eligibility to be in bankruptcy. The agency is appealing San Bernardino’s ability to be a municipal bankruptcy debtor under Chapter 9 of the U.S. Bankruptcy Code and to support the pension fund’s ability to obtain discovery related to that question, according to court documents. CalPERS is also challenging Judge Jury and demanding more options for appealing Judge Jury’s decision finding San Bernardino eligible, claiming an appeal of a federal bankruptcy court order may be made to either the U.S. District court or the bankruptcy appellate panel, or certified for direct appeal to the Ninth U.S. Circuit Court of Appeals. In contrast, in her decision, Judge Jury wrote that, procedurally, the agency must obtain leave from the U.S. District Court to appeal what she described as “the interlocutory eligibility order.” She said the Ninth Circuit only has jurisdiction on final decisions, not interlocutory, or non-final matters. However, CalPERS cited a 2008 Ninth Circuit court decision (General Electric Capital Corp. v. Future Media Productions), in which the Ninth Circuit panel held that it has discretionary jurisdiction to hear appeals of non-final orders upon certification by the bankruptcy court; so that CalPERS noted: “If this court (the U.S. Bankruptcy court) denies CalPERS’ certification request despite the Ninth Circuit precedent provided herein, or does not enter an order by Nov. 16, CalPERS will be forced to file a prophylactic certification request with the district court in order to avoid any argument.” In her oral decision two weeks ago, Judge Jury opined that she did not think the question was one that was “ripe” for the Ninth Circuit court of appeals to consider, noting that if the U.S. district court were to grant leave, it would be with a “full picture of why they think or don’t think the questions are significant to go to the Ninth Circuit…They might not grant leave.” Judge Jury added that she thinks the questions of eligibility are “issues that need to be addressed by an appellate court” just before announcing she was denying CalPERS’ motion without prejudice: “We are, all of us floundering around out there trying to figure out what these words mean, and that it will be helpful for all cases in this state and probably in the country, if the issues get to the appellate courts.”

Fire in the Budget Hole. While risking being burned on the CalPERS front, San Bernardino is confronted with hard choices on other, critical parts of its budget as it struggles to begin to put together a recovery plan, even in the middle of not just court proceedings, but also post-election changes in leadership—changes that will not be fully settled until next winter after the mayoral runoff. The Fire Department has been asked to present a plan within two weeks that will cut $2 million by the end of this fiscal year and $4 million from the following year’s budget, according to a memorandum from Fire Chief George Avery. Chief Avery wrote that City Manager Allen Parker ordered the plan, which must be approved by the City Council before it can be implemented, so that it could be presented before the mediation the city has scheduled Nov. 25-27 with CalPERS: “The primary reason for these unbelievable cuts is to pay CalPERS,” Chief Avery noted. Chief Avery is seeking to do everything in his power to ensure there are no layoffs, but also so that no “major impacts to service” will be experienced by the public.” City Manager Parker said the direction was based on a Santa Clara Grand Jury report on how fire departments can save money with more modern practices, and would not necessarily mean service reductions. In addition, Mr. Parker said he plans to meet with managers and rank-and-file fire employees before mediation begins, and will approach the Police Department after an interim or permanent replacement for departing Police Chief Robert Handy is appointed. In an ironic twist, federal grant requirements are complicating this process. According to Chief Avery, nine new firefighters must be hired, or San Bernardino risks losing $6.6 million in federal SAFER grants it received in 2011 and 2012. Jim Morris, San Bernardino Mayor Pat Morris’ son and chief of staff, said he was unaware of any requested cuts, but would expect the city manager to be working with all department heads prior to bringing those ideas to the City Council. The $2 million in savings are intended to be seen by the end of the fiscal year, June 30. Because the cuts would then be in place for all of the following year, that should create the desired $4 million in savings over the 2013-14 year without further cuts.

Taking Stock in Stockton. If breaking up is hard to do, getting out of municipal bankruptcy is harder. With a successful election outcome last week providing new revenues, trying to reach an agreement with the city’s two outstanding creditors remains another hurdle. The city, which filed for chapter 9 a year ago last June, hopes it is in the final stages of obtaining U.S. Bankruptcy Judge Christopher Klein’s ok on its recovery plan, or plan of adjustment, based on its negotiations with all its creditors—and after the completion of renegotiation of millions of dollars’ worth of debts, union contracts, and city employee health benefits. Now attorneys for Franklin High Yield Tax-Free Income Fund and Franklin California High Yield Municipal Fund have filed papers requesting Judge Klein to mandate that the city show them the details of its other deals, claiming the municipality has withheld the fine print of tentative agreements it has reached with other creditors. Stockton City Attorney Marc Levinson noted that the city does not yet have an agreement with either the Stockton Ports baseball team or Franklin: “When you can’t get a deal, it’s war….That doesn’t mean no deal will ever be reached. Right now, there’s no deal.” The Fund holds $35 million in bond debt Stockton issued in 2009 to repair streets, build new police and fire stations, a police communication center, and seven new parks. As collateral, the city put up its two public golf courses and Oak Park, which Franklin could seize. In negotiations, the city has offered to pay Franklin $95,000, an amount equal to .27% of its investment, according to court documents. Wells Fargo Bank, trustee of the 2009 bonds, has filed a similar objection. Franklin appears to be seeking much greater disclosure and transparency, arguing, for instance, that Stockton agreed to give each police officer 44 hours of paid time off to wipe away $8.5 million in lawsuits, but the city has not provided the value of that arrangement, and claims that Assured Guaranty appears to be in line to receive 52% of a $125 million pension obligation bond or possibly up to 100% based on “contingent payments,” which the firms claims are “fuzzy.” Finally, on one of the most sensitive issues, Franklin objects that CalPERS, the city’s largest creditor, is not being asked to take any haircut. Judge Klein has scheduled arguments for next week (the 18th). He could send the city back to the drawing board or reject Franklin’s objections and approve Stockton’s exit plan. Once Judge Klein approves the plan, the creditors will vote whether or not to accept it—and, if accepted, the holdouts could be forced to accept the challenged offers, or, in bankruptcy argot: a cramdown.



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